As filed with the Securities and Exchange Commission on February 14, 1997.
File Nos.
33-20313
811-5479
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 14 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(813) 823-8712
BARABARA GREEN 700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [date] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[X] on May 1, 1997 pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24F-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on (to be provided in by amendment),
1997.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Money Market Fund)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Bond Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton International Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Asset Allocation Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Stock Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Developing Markets Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Franklin Growth Investments Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Mutual Discovery Investments Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Mutual Shares Investments Fund Class 1 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Bond Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton International Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Asset Allocation Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Stock Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Templeton Developing Markets Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Franklin Growth Investments Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Mutual Discovery Investments Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PART A: INFORMATION REQUIRED IN PROSPECTUS
(For Mutual Shares Investments Fund Class 2 Shares)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Investment Objective and Policies;
Description of Securities and Investment
Techniques"
5. Management of the Fund "Management of Trust"
5A. Management's Discussion of Contained in Registrant's Annual Report to
Fund Performance Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares"; "Net Asset Value"
Being Offered
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
STATEMENT OF ADDITIONAL INFORMATION
(For All Series)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "General Information and History"
and History
13. Fund Investment "Investment Objectives and Policies"
Objectives and
Policies
14. Management of the Fund "Management of the Trust"
15. Control Persons and "Principal Shareholders"
Principal Holders of
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Brokerage Allocation"
18. Capital Stock and "Description of Shares"; "Other
Other Securities Information" in the Prospectus)
19. Purchase, Redemption "Purchase and Redemption of Shares"; "Net
and Pricing of Asset Value" in the Prospectus)
Securities Being
Offered
20. Tax Status "Tax Status"
21. Underwriters Purchase of Shares (Prospectus)
22. Calculation of "Yield and Performance Information"
Performance Data
23. Financial Statements Financial Statements
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Money Market Fund
This Prospectus offers shares of Templeton Money Market Fund ("Fund"), a
diversified series of Templeton Variable Products Series Fund (the "Trust"), an
open-end, management investment company. It contains information that a
prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. For more
information about the Fund's multiclass structure, see "Other Information -
Capitalization and Voting Rights," in this Prospectus.
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 currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
FINANCIAL HIGHLIGHTS ..................
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ..................
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report for each of the last five fiscal years, appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1996. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
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 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.
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 their 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 these shares directly from the Fund.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Fund may be subject to limits
applicable in the Contract purchased.
NET ASSET VALUE
The net asset value is determined as of the scheduled close of the NYSE
generally 4:00 p.m., Eastern time.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
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 other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. The Investment Manager of the Fund is Templeton Global Bond
Managers, a division of Templeton Investment Counsel, Inc. TICI is a Florida
corporation with offices at Broward Financial Centre, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
TICI also performs similar services for other funds. TICI is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
trough its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together TICI and its affiliates manage
over $179 billion in assets. The Templeton organization has been investing
globally since 1940. TICI and its affiliates have offices in Argentina,
Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy,
Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S., and
Vietnam. Please see "Investment Management and Other Services" and "Brokerage
Allocation" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.35% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of
U.S.Government securities, each U.S. Government agency or instrumentality is
treated as a separate issuer. Any securities issued, guaranteed, or insured (to
the extent so guaranteed or insured) by the U.S. Government or an
instrumentality of the U.S. Government are treated as a U.S. Government security
for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
The Fund may include its 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.
The investment results will vary. Performance figures are always based on past
performance and do not guarantee future results. For a description of the
methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Bond Fund
CLASS 1 SHARES
- -----------------------------------------------------------------------------
This Prospectus offers only Class 1 shares of Templeton Bond Fund ("Fund"), a
diversified series of Templeton Variable Products Series Fund (the "Trust"), an
open-end, management investment company. It contains information that a
prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
FINANCIAL HIGHLIGHTS ..................
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report for each of the last five fiscal years, appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1996. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is high current income. The Fund seeks to
achieve its objective through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various nations
throughout the world, and in debt securities which are convertible into common
stock of such companies. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in bonds and debentures of such issuers. The
Fund may invest in debt securities rated in any category by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") and
securities which are unrated by any rating agency. See 'Risk Factors' and the
Appendix in the Statement of Additional Information for a description of the S&P
and Moody's ratings. The Fund and its investment manager, Templeton Global Bond
Managers ("TGBM" or the "Investment Manager"), a division of Templeton
Investment Counsel, Inc. ("TICI"), 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 average maturity of debt securities in the Fund's portfolio will fluctuate
depending upon TGBM's judgment as to future interest rate changes.
Debt securities in which the Fund may also invest include various corporate debt
obligations, structured investments, commercial paper, certificates of deposit,
bankers' acceptances, and repurchase agreements with respect to these
securities.
The Fund may also buy and sell financial futures contracts, bond index futures
contracts, and foreign currency futures contracts. The Fund may purchase and
sell any of these futures contracts for hedging purposes only and not for
speculation. It may engage in such transactions only if the total contract value
of the futures contracts does not exceed 20% of the Fund's total assets. In
addition, the Fund may invest in forward foreign currency exchange contracts,
options on foreign currencies, depositary receipts, "when-issued" securities and
collateralized mortgage obligations, lend its portfolio securities, and borrow
money for investment purposes (i.e., "leverage" its portfolio). These investment
techniques are discussed under "Description of Securities and Investment
Techniques."
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in the 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 are
securities representing part ownership of a pool of mortgage loans on which
interest and principal payments are guaranteed by the Treasury. Principal is
repaid monthly over the term of the loan. Expected payments may be delayed due
to the delays in registering newly traded certificates. The mortgage loans will
be subject to normal principal amortization and may be prepaid prior to
maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs 'pass-through' the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in bankers'
acceptances, which are negotiable drafts or bills of exchange normally drawn by
an importer or exporter to pay for specific merchandise and which are 'accepted'
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. The Fund may invest in
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion. The Fund may
also invest in certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid .
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by the Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Fund's assets invested in debt securities
rated in each of the specific rating categories shown and those that are not
rated by the rating agency but deemed by the Manager to be of comparable credit
quality. The information was prepared based on a 12 month weighted average of
the portfolio compositions in the fiscal year ended December 31, 1996. The
Appendix to this Prospectus includes a description of each rating category. S&P
AAA................. 78.45%
AA+................. 5.50%
A+.................. 4.56%
A................... 0.38%
A-.................. 1.20%
BBB................. 0.62%
BBB-................ 0.87%
BB.................. 5.06%
BB-................. 3.36%
4.75% of these securities, which are unrated by S&P, have been included in the
following rating categories:
AA+............. 2.05%
A+.............. 0.27%
BBB-............ 0.87%
BB.............. 1.56%
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a 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.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell bond index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as 'initial margin,' as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
'variation margin,' to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. There is
no assurance that the Investment Manager's hedging strategies will be
successful.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securities market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. The Board may consider a change
in thisoperating 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER
INVESTMENT MANAGER. Templeton Investment Counsel, Inc. TICI is a Florida
corporation with offices at Broward Financial Centre, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
TICI also performs similar services for other funds. TICI is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
trough its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together TICI and its affiliates manage
over $179 billion in assets. The Templeton organization has been investing
globally since 1940. TICI and its affiliates have offices in Argentina,
Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy,
Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S., and
Vietnam. Please see "Investment Management and Other Services" and "Brokerage
Allocation" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager of the Fund since 1993 is
Thomas Latta, Vice President of TGBM. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed
markets fixed income and has research responsibilities for the core European
markets. Mr. Latta is also responsible for internal fixed income systems
development. Mr. Latta began working in the securities industry in 1981. His
experience includes seven years with Merrill Lynch where he was part of an
investment team to the Saudi Arabian Monetary Authority in Riyadh, Saudi
Arabia. While at Merrill Lynch, Mr. Latta also acted as an advisor to
investment managers concerning the modeling and application of interest rate
strategies in fixed income portfolios. Mr. Latta attended the University of
Missouri and New York University. Cindy New and Neil Devlin exercise
secondary portfolio management responsibilities with respect to the Fund. Mr.
Devlin, Executive Vice President of the Investment Manager, joined the
Templeton organization in 1987 and has managed the Fund since May 1996. Prior
to that time, he was a portfolio manager and bond analyst with Constitutional
Capital Management of Boston, where he managed a portion of the Bank of New
England's pension money, a number of trust and corporate pension accounts,
and began and managed a mortgage-backed securities fund for the Bank. Before
that, Mr. Devlin was a bond trader and research analyst for the Bank of New
England. Mr. Devlin holds a BA from Brandeis University. Ms. New an analyst
with the Investment Manager, joined the Templeton organization in 1993 and
has managed the Fund since May 1996. Prior to that time, she was an auditor
with the accounting firm of Deloltte and Touche. Ms. New maintains emerging
markets research responsibilities fro Africa, Developing Europe and the
Middle East. Ms. New holds a masters in business administration degree from
the University of Central Florida and a bachelor of science degree in
accounting from the University of Florida.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central Avenue,
St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813) 823-8712,
Fund.des certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 1 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton International Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Templeton International Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
FINANCIAL HIGHLIGHTS .................. T-2
INVESTMENT OBJECTIVE AND POLICIES .... T-2
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES ............. T-3
RISK FACTORS .......................... T-5
PURCHASE OF SHARES .................... T-7
NET ASSET VALUE ....................... T-7
REDEMPTION OF SHARES ............ T-7
EXCHANGES ....................... T-7
MANAGEMENT OF THE TRUST ......... T-7
BROKERAGE COMMISSIONS ........... T-9
DIVIDENDS AND DISTRIBUTIONS .... T-9
FEDERAL INCOME TAX STATUS ...... T-9
OTHER INFORMATION ............... T-10
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report for each of the last five fiscal years, appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1996. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital growth through a flexible
policy of investing in stocks and debt obligations of companies and governments
outside the United States. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in securities of issuers in at least three
countries outside the United States. Any income realized will be incidental.
Although the Fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities such as convertible bonds which are
rated in any category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody"s') or which are unrated by any rating agency.
See the Appendix in the Statement of Additional Information for a description of
the S&P and Moody's ratings. The Fund will invest predominantly in equity
securities issued by large-cap and mid-cap companies. Large-cap companies are
those which have market capitalizations of $5 billion or more; mid-cap companies
are those which have market capitalizations of $1 billion to $5 billion. It may
also invest to a lesser degree in smaller capitalization companies, which may be
subject to different and greater risks. See "Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency of
any nation, bankers' acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities. The
Fund may also enter into firm commitment agreements, purchase securities on a
"when-issued" basis, invest in restricted securities, such as private
placements, lend its portfolio securities and borrow money for investment
purposes. (See "Description of Securities and Investment Techniques.")
The Fund may purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes only and
not for speculation. It may engage in such transactions only if the total
contract value of the futures contracts does not exceed 20% of the Fund's total
assets. (See "Description of Securities and Investment Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in the various 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. The Fund may hold cash
and time deposits with banks in the currency of any major nation.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. 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 or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid .
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by the Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell stock index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in currency valuations will also 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 Managers will
not always be profitable or prove to have been correct. The Fund is not intended
as a complete investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there is
less publicly available information about issuers than is available in reports
about companies in the United States. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securites market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund may invest in companies with relatively small revenues and limited
product lines. Small companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
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 D 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. 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of futures contracts is subject to special risk considerations
and transaction costs. A liquid secondary market for futures contracts may not
be available when a position is sought to be closed. In addition, there may be
an imperfect correlation between movements in the securities or foreign currency
on which the contract is based and movements in the securities in the Fund's
portfolio or the currencies in which they are denominated. Successful use of
forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct.
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
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for the Fund since July 1996 is
Peter Nori. Mr. Nori, Vice President of TICI, completed Franklin's management
training program before moving into portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund. He
has exercised secondary portfolio management responsibilities for the Fund since
1995. Mr. Nori's current responsibilities include covering the data
processing/software, textile and apparel stocks, steel stocks and country
coverage of Austria. He holds a B.A.degree in Finance and an M.B.A. with an
emphasis in finance from the University of San Francisco and is a Chartered
Financial Analyst. Gary Motyl and Stephen Oler exercise secondary portfolio
management responsibilities. Mr. Motyl, Executive Vice President and Director of
TICI, has been a security analyst and portfolio manager with TICI since 1981.
His research responsibilities include the global automobile industry and country
coverage of Germany. Prior to joining the Templeton organization, Mr. Motyl
worked from 1974 to 1979 as a security analyst with Standard & Poor's
Corporation,and from 1979 to 1981 was a research analyst and portfolio manager
with Landmark First National Bank. Mr. Motyl holds a B.S. degree in Finance from
Lehigh University and an M.B.A.from Pace University and is a Chartered Financial
Analyst. Mr.Oler, Vice President of TICI, is a portfolio manager and research
analyst whose research responsibilities include industry coverage of the global
non-life insurance industry and country coverage of Mexico and Greece. Before
joining the Templeton organization in 1996, Mr. Oler was a senior vice president
at Baring Asset Management, where he was responsible for Latin American
portfolio management and research. During his 11-year stay at Barings, he
followed European equities from the London office, then moved in 1989 to the
Boston office where he followed Canadian equities. Beginning in 1993 he devoted
his full time to following Latin stocks. Mr. Oler received a master of
philosophy degree in international relations from King's College, Cambridge
University, and a B.A. degree with honors from the University of Pennsylvania in
American history. He is a Chartered Financial Analyst.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 1 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so qualifies
it generally will not be subject to federal income taxes on amounts distributed
to Shareholders. In order to qualify as a regulated investment company, the Fund
must, among other things, meet certain source of income requirements. In
addition, the Fund must diversify its holdings so that, at the end of each
quarter of the taxable year, (a) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. Government securities, the securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of
U.S.Government securities, each U.S. Government agency or instrumentality is
treated as a separate issuer. Any securities issued, guaranteed, or insured (to
the extent so guaranteed or insured) by the U.S. Government or an
instrumentality of the U.S. Government are treated as a U.S. Government security
for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Asset Allocation Fund
Class 1 Shares
This Prospectus offers only Class 1 shares of Templeton Global Asset Allocation
Fund ("Fund"), a diversified series of Templeton Variable Products Series Fund
(the "Trust"), an open-end, management investment company. It contains
information that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
FINANCIAL HIGHLIGHTS ..................
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report for each of the last five fiscal years, appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1996. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks a high level of total return through a flexible policy of
investing in the following market segments: stocks of companies in any nation,
debt securities of companies and governments of any nation, and money market
instruments. The mix of investments among these three market segments will be
adjusted in an attempt to capitalize on total return potential produced by
changing economic conditions throughout the world. The Fund and its investment
manager, Templeton Investment Counsel, Inc. ("TICI" or the "Investment Manager")
may, from time to time, use various methods of selecting securities for the
Fund's portfolio, and may also employ and rely on independent or affiliated
sources of information and ideas in connection with the management of the Fund's
portfolio. There can be no assurance that the Fund will achieve its investment
objective.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under "Investment Restrictions" in the SAI, the Fund's Investment
Manager has complete flexibility in determining the amount and nature of stock,
debt securities or money market instruments in which the Fund may invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in
collateralized mortgage obligations and restricted securities, lend its
portfolio securities, and borrow money for investment purposes.
The Fund may purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes only and
not for speculation. It may engage in such transactions only if the total
contract value of the futures contracts does not exceed 20% of the Fund's total
assets. The Fund may also invest in forward foreign currency exchange contracts
and options on foreign currencies. (See "Description of Securities and
Investment Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the SAI. Those investment restrictions so
designated and the investment objective of the Fund are "fundamental policies"
of the Fund, which means that they may not be changed without a majority vote of
Shareholders of the Fund. With the exception of the Fund's investment objective
and those restrictions specifically identified as fundamental, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Board of Trustees may change them without
Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and use the various investment
techniques described below. Although these strategies are regularly used by some
investment companies and other institutional investors in various markets, some
of these strategies cannot at the present time be used to a significant extent
by the Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates represent
part ownership of a pool of mortgage loans on which interest and principal
payments are guaranteed by the Treasury. Principal is repaid monthly over the
term of the loan. Expected payments may be delayed due to the delays in
registering newly traded certificates. The mortgage loans will be subject to
normal principal amortization and may be prepaid prior to maturity. Reinvestment
of prepayments may occur at higher or lower rates than the original yield on the
certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") or A-1 or A-2 by Standard & Poor's Corporation ("S&P") or, if
not rated by Moody's or S&P, issued by companies having an outstanding debt
issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the Appendix
in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. As an operating policy, which may be changed by the Board of
Trustees without shareholder approval, the Fund will not invest more than [15%]
of its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. 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. Consistent with this limit the Fund will
not invest more than 10% of its total assets in defaulted debt securities, which
may be illiquid . Bonds rated BB or lower, commonly referred to as "junk bonds,"
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
may be in default. Issuers of bonds rated Ca may often be in default. Regardless
of rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by the Fund's Investment Manager to
determine that the planned investment is sound. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. Many debt obligations of foreign issuers, and
especially developing markets issuers, are either (i) rated below investment
grade or (ii) not rated by U.S. rating agencies so that their selection depends
on the Investment Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell stock index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. There is
no assurance that the Investment Manager's hedging strategies will be
successful.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. As an operating policy, which
may be changed by the Board of Trustees without Shareholder approval, the Fund
will not invest more than [15]% of its total assets in debt securities rated
lower than BBB by S&P or Baa by Moody's. 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager of the fixed income portion of
the Fund since 1993 is Thomas Latta, Vice President of Templeton Global Bond
Managers ("TGBM"), a division of TICI. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed markets
fixed income and has research responsibilities for the core European markets.
Mr. Latta is also responsible for internal fixed income systems development. Mr.
Latta began working in the securities industry in 1981. His experience includes
seven years with Merrill Lynch where he was part of an investment team to the
Saudi Arabian Monetary Authority in Riyadh, Saudi Arabia. While at Merrill
Lynch, Mr. Latta also acted as an advisor to investment managers concerning the
modeling and application of interest rate strategies in fixed income portfolios.
Neil Devlin and William T. Howard Jr., exercise secondary portfolio management
responsibilities with respect to the fixed income portion of the Fund. Mr.
Devlin, Executive Vice President of TGBM, joined the Templeton organization in
1987. Prior to that time, he was a portfolio manager and bond analyst with
Constitutional Capital Management of Boston, where he managed a portion of the
Bank of New England's pension money, a number of trust and corporate pension
accounts, and began and managed a mortgage-backed securities fund for the Bank.
Before that, Mr. Devlin was a bond trader and research analyst for the Bank of
New England. Mr. Wilkinson, Vice President of TGBM, joined the Templeton
organization in 1985 and is the senior portfolio manager for Franklin
Templeton's emerging markets fixed income group with research responsibilities
covering East Asia.
The lead portfolio manager for the equity portion of the Fund since 1995 is Gary
Clemons, Vice President of TICI. He is a research analyst with responsibility
for the financial services and telecommunications industry, as well as country
coverage of Argentina and Sweden. Prior to joining the Templeton organization in
1993, Mr. Clemons worked as a research analyst for Structured Asset Management
in New York, a subsidiary of Templeton International, where his duties included
management of a small capitalization fund. He holds an M.B.A. with an emphasis
on finance/investment banking from the University of Wisconsin and a B.S. from
the University of Nevada-Reno. Peter Nori and William T. Howard Jr., exercise
secondary portfolio management responsibilities for the equity portion of the
Fund. Mr. Nori, Vice President of the Investment Manager, is a research analyst
whose current responsibilities include covering data processing/software,
textile and apparel stocks. Mr. Nori completed Franklin's management training
program before moving into portfolio research in 1990 as an equity analyst and
co-portfolio manager of the Franklin Convertible Securities Fund. He holds a
B.S. degree in Finance and an M.B.A. with an emphasis in finance from the
University of San Francisco. Mr. Howard holds a BA in international studies from
Rhodes College and an MBA in finance from Emory University. He is a Chartered
Financial Analyst and a member of the Financial Analyst Society. Before joining
the Templeton Organization in 1993, Mr. Howard was a portfolio manager and
analyst with the Tennessee Consolidated Retirement System in Nashville,
Tennessee, where he was responsible for research and management of the
international equity portfolio, and specialized in the Japanese equity market.
As a portfolio manager and research analyst with Templeton, Mr. Howard's
research responsibilities include the transportation, shipping, machinery and
engineering industries worldwide. He is also responsible for country coverage of
both Japan and New Zealand.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.66% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 1 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
Templeton Variable Products Series Fund
Prospectus - May 1, 1997
Templeton Developing Markets Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Templeton Developing Markets Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT TECHNIQUES
RISK FACTORS
PURCHASE OF SHARES
NET ASSET VALUE
REDEMPTION OF SHARES
EXCHANGES
MANAGEMENT OF THE TRUST
BROKERAGE COMMISSIONS
DIVIDENDS AND DISTRIBUTIONS
FEDERAL INCOME TAX STATUS
OTHER INFORMATION
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report appears in the financial statements in the Trust's Annual Report
for the fiscal year ended December 31, 1996. The Trust's annual report also
includes more information about the Fund's performance. For a free copy, please
call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
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 ervices 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 relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
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. There is no assurance that the Investment Manager's hedging
strategies will be successful.
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. As a
non-fundamental policy, the Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. For more information on these risks and other
risks associated with Russian securities, please see "Investment Objectives and
Policies--Risk Factors" in the SAI.
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 D 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.
The market value of junk bonds tends to reflect individual developments
affecting the issuer to a greater extent than the market value of higher rated
obligations, which react primarily to fluctuations in the general level of
interest rates. Lower rated obligations tend to be more sensitive to economic
conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
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
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Asset Management Ltd. ("Templeton Singapore") , a
Singapore corporation with offices at 7 Temasek Blvd., #38-03, Suntec Tower One,
Singapore 038987. Templeton Singapore manages the Fund's assets and makes its
investment decisions. Templeton Singapore also performs similar services for
other funds. Templeton Singapore is wholly owned by Resources, a publicly owned
company engaged in the financial services industry trough its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together Templeton Singapore and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. Templeton Singapore and its affiliates have offices in Argentina,
Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy,
Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S., and
Vietnam. Please see "Investment Management and Other Services" and "Brokerage
Allocation" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his
Bachelor's and Master's degrees from Boston University. He is a member of
several industry-related associations. Dr. Mobius joined the the Franklin
Templeton Group in 1987 and has managed the Developing Markets Fund from
inception.
H. Allan Lam
Portfolio Manager and Analyst
Templeton Asset Management Ltd.
Mr. Lam holds a Bachelors of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined the Franklin Templeton Group in 1987 and has
managed the Developing Markets Fund from inception.
Tom Wu
Director, Portfolio Manager, and Analyst
Templeton Asset Management Ltd.
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining the Franklin Templeton Group, in 1987,
he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has managed the
Developing Markets Fund from inception.
Dennis Lim
Vice President, Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. Prior to joining the Franklin Templeton
Group, in 1990, he worked for the Government of Singapore's Ministry of National
Development. He has managed the Fund since February 1996.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group in, 1994, he
worked for many years in the finance and banking industry. He has managed the
Fund since February 1996.
Tek-Khoan Ong
Portfolio Manager
Tempelton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a Bachelor
of Science degree in computing science and a Bachelor of Science degree, with
honors, both from Imperial College, University of London, UK. Prior to joining
the Franklin Templeton Group, in 1993, he worked for the Monetary Authority of
Singapore (Singapore's central bank)for five years. He has managed the Fund
since February 1996.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid [to
be supplied by amendment] of its average daily net assets in management fees.
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.
PORTFOLIO TRANSACTIONS. Templeton Singapore tries to obtain the best execution
on all transactions. If Templeton Singapore believes more than one broker or
dealer can provide the best execution, consistent with internal policies it may
consider research and related services and the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "Brokerage Allocation" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 1 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class 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
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Franklin Growth Investments Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Franklin Growth Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The primary investment objective of the Franklin Growth Investments Fund is
capital appreciation. Current income is only a secondary consideration in
selecting portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65% of
assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer favorable
possibilities for capital appreciation, but some of which may yield little or no
current income. The Fund's assets may be invested in shares of common or capital
stock traded on any national securities exchange or over-the-counter, in
convertible securities or, for temporary or defensive purposes, in cash and
money market instruments. From time to time, the Fund may hold significant cash
positions, consistent with its policy on temporary investments, until suitable
investment opportunities are available.
The Investment Manager will generally make long-term investments in equity
securities which have been selected based upon fundamental and quantitative
analysis. The Fund will invest predominantly in equity securities issued by
large-cap or mid-cap U.S. companies, which have market capitalizations of $1
billion or more. It may also invest in smaller capitalization companies, which
may be subject to different and greater risks, but there is no present intention
of investing more than 20% of the Fund's assets in such securities. As an
operating policy, the Fund currently intends to invest no more than 15% of its
assets in foreign securities, including Depository Receipts.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund does not currently intend to invest more than 5% of its assets in bonds
rated BB or lower by Standard & Poors or Ba or lower by Moody's, or in unrated
bonds of similar quality as determined by the Investment Manager, commonly
referred to as "junk bonds." Junk bonds are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. Higher yields
are generally available from securities in the lower rating categories of S&P or
Moody's. However, the values of lower rated securities generally fluctuate more
than those of higher rated securities. As a result, lower rated securities
involve greater risk of loss of income and principal than higher rated
securities. See "Risk Factors," below. For a description of debt securities
ratings, see the Appendix to the SAI.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTION CONTRACTS
The Fund may also write covered call options and purchase put options on
securities. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in Money Market Instruments. The Fund
may therefore invest up to 100% of its net assets in short-term debt securities
including, for example, U.S. Government Securities, bank obligations, and the
highest quality commercial paper, or in repurchase agreements, as described
above. The Fund may also invest in non-U.S. currency and short-term instruments
denominated in non-U.S.
currencies for temporary defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. The Investment Manager currently expects that such
investments will not exceed 15% of the Fund's assets. An investor should
consider carefully the risks involved in investing in securities issued by
companies and governments of foreign nations, which are in addition to the usual
risks inherent in domestic investments. These risks are often heightened for
investments in developing markets, including certain Eastern European countries.
See "Investment Objectives and Policies--Risk Factors" in the SAI. There is the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations (including, for example, withholding taxes
on interest and dividends) or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), foreign investment controls
on daily stock movements, default in foreign government securities, political or
social instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities 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.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. The Fund currently intends,
however, to invest no more than 5% of its total assets in debt securities rated
lower than BBB by S&P or 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
Options contracts are subject to special risk considerations and transaction
costs. A liquid secondary market for these 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 is based and movements in the securities or currency in the Fund's
portfolio or the currencies in which they are denominated. Successful use of
these contracts is further dependent on the ability of the Fund's Investment
Manager to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct. 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
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. , 777 Mariners Island Blvd., San
Mateo, California, 94404, is the Investment Manager. Advisers manages the
Fund's assets and makes its investment decisions. Advisers also performs
similar services for other funds. Advisers is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together Advisers and its affiliates manage over
$179 billion in assets. Please see "Investment Management and Other Services"
and "Brokerage Allocation" in the SAI for information on securities
transactions and a summary of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with the Franklin Templeton Group since
1989 and prior thereto was Vice President and General Manager of Aquila
Management. He will manage the Fund from inception.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams
College. He has been with the Franklin Templeton Group since 1965. Mr.
Palmieri will manage the Fund from inception.
Kei Yamamoto, CFA
Portfolio Manager
Franklin Advisers, Inc.
Ms. Yamamoto is a Chartered Financial Analyst and has a Master of Science
degree and a Bachelor of Science degree in material science and engineering
from the Massachusetts Institute of Technology. Prior to joining the Franklin
Templeton Group in 1994, Ms Yamamoto worked at Goldman Sachs & Co. as a
financial analyst and at Wasserstein Perella & Co. as an associate and vice
president. Ms Yamamoto will manage the fund from inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and will manage the Fund
from inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.60% of the combined average daily net assets
of the Fund, reduced to 0.50% of such assets in excess of $200 million, to 0.40%
of such assets in excess of $1.3 billion.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
MANAGEMENT FEES. For its services the Fund Administrator, receives a fee
equivlant on an annual basis to 0.15% of the combined average daily net assets
of the Fund and other funds in the Trust, reduced to 0.135% of such assets in
excess of $200 million, to 0.10% of such assets in excess of $700 million, and
to 0.075% of such assets in excess of $1.2 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Mutual Discovery Investments Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Mutual Discovery Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
APPENDIX ........................
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Mutual Discovery Securities Fund is capital
appreciation.
Portfolio Investments. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, and will
tend to invest a substantial portion of its assets in securities of small
capitalization issuers, which have market capitalizations of less than $1
billion. Securities of foreign or small cap issuers may be subject to different
and greater risks, as discussed below. The Fund may invest in securities that
are traded on U.S. or foreign exchanges, NASDAQ national market or in the
over-the-counter market. It may invest in any industry sector, although it will
not concentrate in any one industry. From time to time, the Fund may hold
significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation loan participations and trade claims, of debtor companies involved in
reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
Selection of Portfolio Investments. The Fund's general policy is to invest in
securities which, in the opinion of its Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of influencing
or controlling management, such as investing in a potential takeover or
leveraged buyout or investing in other entities engaged in such practices.
Foreign Investments. The Fund may purchase securities in any foreign country,
developed or undeveloped. The Fund presently does not intend to invest more than
5% of its assets in developing markets securities. Foreign investments may
include both voting and non-voting securities, sovereign debt and participation
in foreign government deals. The Fund's investments in foreign securities
involve risks related to currency fluctuations, market volatility, and economic,
social, and political uncertainty that are different from investing in similar
domestic securities. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS
INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED IN
DEVELOPING MARKETS. SEE "RISK FACTORS" BELOW AND IN THE SAI.
Currency Techniques. The Fund generally expects it will hedge against
currency risks to the extent that hedging is available. Currency hedging
techniques may include investments in foreign currency futures contracts,
options on foreign currencies or currency futures, forward foreign currency
exchange contracts ("forward contracts") and currency swaps, all of which
involve specialized risks. See "RISK FACTORS."
Risks Associated with Small Cap Investments. Securities of smaller companies,
particularly if they are unseasoned, present greater risks than securities of
larger, more established companies. The smaller companies in which the Fund
invests are often not well known, may often trade at a discount and may not be
followed by institutions. The companies may have relatively small revenues,
limited product lines, and a small share of the market for their products or
services. Small cap companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms, or they may
be developing or marketing new products or services for which markets are not
yet established and may never become established. Due to these and other
factors, small cap companies may suffer significant losses as well as realize
substantial growth, and investments in such companies tend to be more volatile
and are therefore speculative. Besides exhibiting greater volatility, small cap
company stocks may fluctuate independently of larger company stocks. See also
"Description of Securities Investment Techniques."
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "RISK
FACTORS" AND APPENDIX.
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities or for temporary 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. Leveraging by means of borrowing
will exaggerate the effect of any increase or decrease in the value of portfolio
securities on the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Higher yields are generally available from securities in the lower rating
categories of S&P or Moody's. However, the values of lower rated securities
generally fluctuate more than those of higher rated securities. As a result,
lower rated securities involve greater risk of loss of income and principal than
higher rated securities. See "Risk Factors," below. For a description of debt
securities ratings, see the Appendix.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
COMMERCIAL PAPER
The Fund may invest in commercial paper, regardless of its rating. Commercial
paper includes short-term unsecured promissory notes issued or guaranteed by
domestic or foreign corporations with a maximum maturity of 270 days. See the
Appendix in the SAI for a description of credit ratings.
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.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Investment Manager
may, however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
LOAN PARTICIPATIONS
The Fund may acquire loan participations in which it will purchase from a lender
a portion of a larger loan which the lender has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable the Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount, and trade at discounts to par value,
because of the borrower's credit problems. To the extent the borrower's credit
problems are resolved, the loan participations may appreciate in value. Such
loan participations, however, carry substantially the same risk as that for
defaulted debt obligations and may cause loss of the entire investment. Many
loan participations are illiquid and such participations will be included in the
Fund's percentage limitation for illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by governmental
institutions, such as the Resolution Trust Corporation or the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation or may include
supranational organizations such as the World Bank. When the Fund purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTIONS AND FUTURES CONTRACTS
The Fund may invest in purchase and sell exchange-listed and over-the-counter
put and call options on securities, equity and fixed-income indices and other
financial instruments, and may purchase and sell financial futures contracts and
options thereon. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
The Fund will not purchase or sell futures contracts or options on futures
contracts if immediately thereafter the aggregate amount of initial margin
deposits on all the futures positions of the Fund and premiums paid on options
on futures contracts would exceed 5% of the market value of the total assets of
the Fund.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses. A detailed
discussion of these transactions and their risks appears in the SAI. The Fund
does not currently expect to make significant use of these transactions, except
to manage currency risk.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in money market instruments and
short-term debt securities including, for example, U.S. Government Securities,
bank obligations, and the highest quality commercial paper, or in repurchase
agreements, as described above. The Fund may also invest in non-U.S. currency
and short-term instruments denominated in non-U.S. currencies for temporary
defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities and debt obligations on a "when-issued" or
"delayed delivery" basis (in the case of GNMA Certificates, a "To-Be-Announced"
basis). Such securities are subject to market fluctuations prior to delivery to
the Fund and generally do not earn interest until their scheduled delivery date.
When the Fund is the buyer in such transactions, it will segregate cash or
liquid securities, having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage.
Nonetheless, purchases of securities on such basis may involve more risk than
other types of purchases, for example, counterparty delivery risk. If the seller
fails to complete the transaction, the Fund may miss a price or yield considered
advantageous.
RISK FACTORS
GENERAL
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
FOREIGN INVESTMENTS
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
LOWER RATED DEBT OBLIGATIONS
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 D 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 the Appendix for
descriptions of debt securities rated by S&P and 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
SMALL CAPITALIZATION ISSUERS
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
OTHER RISKS
Successful use of forward contracts, options and futures contracts is subject to
special risk considerations and transaction costs. A liquid secondary market for
forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Mutual Advisers, Inc., 51 John F. Kennedy
Parkway, Short Hills, New Jersey, 07078 is the Investment Adviser. Franklin
Mutual manages the Fund's assets and makes its investment decisions. Franklin
Mutual also performs similar services for other funds. Franklin Mutual is
wholly owned by Resources, a publicly owned company engaged in the financial
services industry trough its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together Franklin
Mutual and its affiliates manage over $179 billion in assets. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the
SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Mutual Discovery Securities Fund and
Mutual Shares Securities Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Stanford University Law School. Prior to November 1996, he was a
Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. Mr. Langerman is also a Director
of Sunbeam Oster since 1990, Lancer Industries since 1994 and N.M.M.S.p.A.
since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR
L.L.C. since 1995. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manage the Mutual Discovery Securities Fund and Mutual Shares Securities Fund
from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.80% of the combined average daily net
assets of the Fund.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
For its services the Fund Administrator, receives a fee equivalent on an annual
basis to 0.15% of the combined average daily net assets of the Fund and other
funds in the Trust, reduced to 0.135% of such assets in excess of $200 million,
to 0.10% of such assets in excess of $700 million, and to 0.075% of such assets
in excess of $1.2 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC 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 obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Mutual Shares Investments Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Mutual Shares Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
APPENDIX ........................
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The principal investment objective of the Mutual Shares Securities Fund is
capital appreciation, with income as a secondary objective.
Portfolio Investments. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, including
smaller capitalization companies, which may be subject to different and greater
risks. See "Common Investment Methods and Risks, Smaller Capitalization
Issuers." It will tend to invest, however, in securities of issuers with market
capitalizations in excess of $500 million. It may invest in securities that are
traded on U.S. or foreign exchanges, NASDAQ national market or in the
over-the-counter market. It may invest in any industry sector, although it will
not concentrate in any one industry. From time to time, the Fund may hold
significant cash positions, consistent with its policy on temporary investments,
until suitable investment opportunities are available.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation, loan participations and trade claims, of debtor companies involved
in reorganization or financial restructuring, some of which may have very long
maturities. Some of the indebtedness is illiquid.
Selection of Portfolio Investments. The Fund's general policy is to invest in
securities which, in the opinion of the Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of influencing
or controlling management, such as investing in a potential takeover or
leveraged buyout or investing in other entities engaged in such practices.
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's; however, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "RISK
FACTORS" AND APPENDIX.
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
Foreign Investments. Although the Fund reserves the right to purchase securities
in any foreign country, developed or undeveloped, the Fund's current investment
strategy is to invest primarily in domestic securities, with a significant
portion, but generally less than 50%, of its total assets in foreign securities,
including sponsored or unsponsored Depository Receipts. The Fund presently does
not intend to invest more than 5% of its assets in developing markets
securities. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals. The
Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "RISK Factors" BELOW AND THE SAI.
Currency Techniques. The Fund generally expects it will hedge against currency
risks to the extent that hedging is available. Currency hedging techniques may
include investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
("forward contracts") and currency swaps, all of which involve specialized
risks. See "RISK FACTORS."
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Risk Factors," and in the SAI, the Fund may
also loan its portfolio securities; enter into repurchase transactions; purchase
securities and debt obligations on a "when-issued" or "delayed delivery" basis;
invest in restricted or illiquid securities; purchase and sell exchange-listed
and over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; and engage in other activities specifically
identified for this Fund.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities or for temporary 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. Leveraging by means of borrowing
will exaggerate the effect of any increase or decrease in the value of portfolio
securities on the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Higher yields are generally available from securities in the lower rating
categories of S&P or Moody's. However, the values of lower rated securities
generally fluctuate more than those of higher rated securities. As a result,
lower rated securities involve greater risk of loss of income and principal than
higher rated securities. See "Risk Factors," below. For a description of debt
securities ratings, see the Appendix.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
COMMERCIAL PAPER
The Fund may invest in commercial paper, regardless of its rating. Commercial
paper includes short-term unsecured promissory notes issued or guaranteed by
domestic or foreign corporations with a maximum maturity of 270 days. See the
Appendix in the SAI for a description of credit ratings.
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.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Investment Manager
may, however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
LOAN PARTICIPATIONS
The Fund may acquire loan participations in which it will purchase from a lender
a portion of a larger loan which the lender has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable the Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount, and trade at discounts to par value,
because of the borrower's credit problems. To the extent the borrower's credit
problems are resolved, the loan participations may appreciate in value. Such
loan participations, however, carry substantially the same risk as that for
defaulted debt obligations and may cause loss of the entire investment. Many
loan participations are illiquid and such participations will be included in the
Fund's percentage limitation for illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by governmental
institutions, such as the Resolution Trust Corporation or the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation or may include
supranational organizations such as the World Bank. When the Fund purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTIONS AND FUTURES CONTRACTS
The Fund may invest in purchase and sell exchange-listed and over-the-counter
put and call options on securities, equity and fixed-income indices and other
financial instruments, and may purchase and sell financial futures contracts and
options thereon. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
The Fund will not purchase or sell futures contracts or options on futures
contracts if immediately thereafter the aggregate amount of initial margin
deposits on all the futures positions of the Fund and premiums paid on options
on futures contracts would exceed 5% of the market value of the total assets of
the Fund.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses. A detailed
discussion of these transactions and their risks appears in the SAI. The Fund
does not currently expect to make significant use of these transactions, except
to manage currency risk.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in money market instruments and
short-term debt securities including, for example, U.S. Government Securities,
bank obligations, and the highest quality commercial paper, or in repurchase
agreements, as described above. The Fund may also invest in non-U.S. currency
and short-term instruments denominated in non-U.S. currencies for temporary
defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities and debt obligations on a "when-issued" or
"delayed delivery" basis (in the case of GNMA Certificates, a "To-Be-Announced"
basis). Such securities are subject to market fluctuations prior to delivery to
the Fund and generally do not earn interest until their scheduled delivery date.
When the Fund is the buyer in such transactions, it will segregate cash or
liquid securities, having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage.
Nonetheless, purchases of securities on such basis may involve more risk than
other types of purchases, for example, counterparty delivery risk. If the seller
fails to complete the transaction, the Fund may miss a price or yield considered
advantageous.
RISK FACTORS
GENERAL
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
FOREIGN INVESTMENTS
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
LOWER RATED DEBT OBLIGATIONS
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 D 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 the Appendix for
descriptions of debt securities rated by S&P and 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
SMALL CAPITALIZATION ISSUERS
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
OTHER RISKS
Successful use of forward contracts, options and futures contracts is subject to
special risk considerations and transaction costs. A liquid secondary market for
forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER
INVESTMENT MANAGER. Franklin Mutual Advisers, Inc., 51 John F. Kennedy
Parkway, Short Hills, New Jersey, 07078 is the Investment Adviser. Franklin
Mutual manages the Fund's assets and makes its investment decisions. Franklin
Mutual also performs similar services for other funds. Franklin Mutual is
wholly owned by Resources, a publicly owned company engaged in the financial
services industry trough its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together Franklin
Mutual and its affiliates manage over $179 billion in assets. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the
SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Mutual Discovery Securities Fund and
Mutual Shares Securities Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Stanford University Law School. Prior to November 1996, he was a
Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. Mr. Langerman is also a Director
of Sunbeam Oster since 1990, Lancer Industries since 1994 and N.M.M.S.p.A.
since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR
L.L.C. since 1995. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manage the Mutual Discovery Securities Fund and Mutual Shares Securities Fund
from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.60% of the combined average daily net
assets of the Fund.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
For its services the Fund Administrator, receives a fee equivalent on an annual
basis to 0.15% of the combined average daily net assets of the Fund and other
funds in the Trust, reduced to 0.135% of such assets in excess of $200 million,
to 0.10% of such assets in excess of $700 million, and to 0.075% of such assets
in excess of $1.3 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC 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 obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Bond Fund
CLASS 2 SHARES
- -----------------------------------------------------------------------------
This Prospectus offers only Class 2 shares of Templeton Bond Fund ("Fund"), a
diversified series of Templeton Variable Products Series Fund (the "Trust"), an
open-end, management investment company. It contains information that a
prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is high current income. The Fund seeks to
achieve its objective through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various nations
throughout the world, and in debt securities which are convertible into common
stock of such companies. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in bonds and debentures of such issuers. The
Fund may invest in debt securities rated in any category by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") and
securities which are unrated by any rating agency. See 'Risk Factors' and the
Appendix in the Statement of Additional Information for a description of the S&P
and Moody's ratings. The Fund and its investment manager, Templeton Global Bond
Managers ("TGBM" or the "Investment Manager"), a division of Templeton
Investment Counsel, Inc. ("TICI"), 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 average maturity of debt securities in the Fund's portfolio will fluctuate
depending upon TGBM's judgment as to future interest rate changes.
Debt securities in which the Fund may also invest include various corporate debt
obligations, structured investments, commercial paper, certificates of deposit,
bankers' acceptances, and repurchase agreements with respect to these
securities.
The Fund may also buy and sell financial futures contracts, bond index futures
contracts, and foreign currency futures contracts. The Fund may purchase and
sell any of these futures contracts for hedging purposes only and not for
speculation. It may engage in such transactions only if the total contract value
of the futures contracts does not exceed 20% of the Fund's total assets. In
addition, the Fund may invest in forward foreign currency exchange contracts,
options on foreign currencies, depositary receipts, "when-issued" securities and
collateralized mortgage obligations, lend its portfolio securities, and borrow
money for investment purposes (i.e., "leverage" its portfolio). These investment
techniques are discussed under "Description of Securities and Investment
Techniques."
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in the 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 are
securities representing part ownership of a pool of mortgage loans on which
interest and principal payments are guaranteed by the Treasury. Principal is
repaid monthly over the term of the loan. Expected payments may be delayed due
to the delays in registering newly traded certificates. The mortgage loans will
be subject to normal principal amortization and may be prepaid prior to
maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs 'pass-through' the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in bankers'
acceptances, which are negotiable drafts or bills of exchange normally drawn by
an importer or exporter to pay for specific merchandise and which are 'accepted'
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. The Fund may invest in
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion. The Fund may
also invest in certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid .
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by the Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Fund's assets invested in debt securities
rated in each of the specific rating categories shown and those that are not
rated by the rating agency but deemed by the Manager to be of comparable credit
quality. The information was prepared based on a 12 month weighted average of
the portfolio compositions in the fiscal year ended December 31, 1996. The
Appendix to this Prospectus includes a description of each rating category. S&P
AAA................. 78.45%
AA+................. 5.50%
A+.................. 4.56%
A................... 0.38%
A-.................. 1.20%
BBB................. 0.62%
BBB-................ 0.87%
BB.................. 5.06%
BB-................. 3.36%
4.75% of these securities, which are unrated by S&P, have been included in the
following rating categories:
AA+............. 2.05%
A+.............. 0.27%
BBB-............ 0.87%
BB.............. 1.56%
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a 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.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell bond index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as 'initial margin,' as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
'variation margin,' to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. There is
no assurance that the Investment Manager's hedging strategies will be
successful.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securities market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. As an operating policy, which
may be changed by the Board of Trustees without Shareholder approval, the Fund
will not invest more than [15%] 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER
INVESTMENT MANAGER. Templeton Investment Counsel, Inc. TICI is a Florida
corporation with offices at Broward Financial Centre, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
TICI also performs similar services for other funds. TICI is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
trough its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together TICI and its affiliates manage
over $179 billion in assets. The Templeton organization has been investing
globally since 1940. TICI and its affiliates have offices in Argentina,
Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy,
Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S., and
Vietnam. Please see "Investment Management and Other Services" and "Brokerage
Allocation" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager of the Fund since 1993 is
Thomas Latta, Vice President of TGBM. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed
markets fixed income and has research responsibilities for the core European
markets. Mr. Latta is also responsible for internal fixed income systems
development. Mr. Latta began working in the securities industry in 1981. His
experience includes seven years with Merrill Lynch where he was part of an
investment team to the Saudi Arabian Monetary Authority in Riyadh, Saudi
Arabia. While at Merrill Lynch, Mr. Latta also acted as an advisor to
investment managers concerning the modeling and application of interest rate
strategies in fixed income portfolios. Mr. Latta attended the University of
Missouri and New York University. Cindy New and Neil Devlin exercise
secondary portfolio management responsibilities with respect to the Fund. Mr.
Devlin, Executive Vice President of the Investment Manager, joined the
Templeton organization in 1987 and has managed the Fund since May 1996. Prior
to that time, he was a portfolio manager and bond analyst with Constitutional
Capital Management of Boston, where he managed a portion of the Bank of New
England's pension money, a number of trust and corporate pension accounts,
and began and managed a mortgage-backed securities fund for the Bank. Before
that, Mr. Devlin was a bond trader and research analyst for the Bank of New
England. Mr. Devlin holds a BA from Brandeis University. Ms. New an analyst
with the Investment Manager, joined the Templeton organization in 1993 and
has managed the Fund since May 1996. Prior to that time, she was an auditor
with the accounting firm of Deloltte and Touche. Ms. New maintains emerging
markets research responsibilities fro Africa, Developing Europe and the
Middle East. Ms. New holds a masters in business administration degree from
the University of Central Florida and a bachelor of science degree in
accounting from the University of Florida.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central Avenue,
St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813) 823-8712,
Fund.des certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 2 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.15%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton International Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Templeton International Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital growth through a flexible
policy of investing in stocks and debt obligations of companies and governments
outside the United States. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in securities of issuers in at least three
countries outside the United States. Any income realized will be incidental.
Although the Fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities such as convertible bonds which are
rated in any category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody"s') or which are unrated by any rating agency.
See the Appendix in the Statement of Additional Information for a description of
the S&P and Moody's ratings. The Fund will invest predominantly in equity
securities issued by large-cap and mid-cap companies. Large-cap companies are
those which have market capitalizations of $5 billion or more; mid-cap companies
are those which have market capitalizations of $1 billion to $5 billion. It may
also invest to a lesser degree in smaller capitalization companies, which may be
subject to different and greater risks. See "Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency of
any nation, bankers' acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities. The
Fund may also enter into firm commitment agreements, purchase securities on a
"when-issued" basis, invest in restricted securities, such as private
placements, lend its portfolio securities and borrow money for investment
purposes. (See "Description of Securities and Investment Techniques.")
The Fund may purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes only and
not for speculation. It may engage in such transactions only if the total
contract value of the futures contracts does not exceed 20% of the Fund's total
assets. (See "Description of Securities and Investment Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in the various 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. The Fund may hold cash
and time deposits with banks in the currency of any major nation.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. 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 or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid .
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by the Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell stock index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in currency valuations will also 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 Managers will
not always be profitable or prove to have been correct. The Fund is not intended
as a complete investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there is
less publicly available information about issuers than is available in reports
about companies in the United States. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securites market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund may invest in companies with relatively small revenues and limited
product lines. Small companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
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 D 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. 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of futures contracts is subject to special risk considerations
and transaction costs. A liquid secondary market for futures contracts may not
be available when a position is sought to be closed. In addition, there may be
an imperfect correlation between movements in the securities or foreign currency
on which the contract is based and movements in the securities in the Fund's
portfolio or the currencies in which they are denominated. Successful use of
forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct.
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
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for the Fund since July 1996 is
Peter Nori. Mr. Nori, Vice President of TICI, completed Franklin's management
training program before moving into portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund. He
has exercised secondary portfolio management responsibilities for the Fund since
1995. Mr. Nori's current responsibilities include covering the data
processing/software, textile and apparel stocks, steel stocks and country
coverage of Austria. He holds a B.A.degree in Finance and an M.B.A. with an
emphasis in finance from the University of San Francisco and is a Chartered
Financial Analyst. Gary Motyl and Stephen Oler exercise secondary portfolio
management responsibilities. Mr. Motyl, Executive Vice President and Director of
TICI, has been a security analyst and portfolio manager with TICI since 1981.
His research responsibilities include the global automobile industry and country
coverage of Germany. Prior to joining the Templeton organization, Mr. Motyl
worked from 1974 to 1979 as a security analyst with Standard & Poor's
Corporation,and from 1979 to 1981 was a research analyst and portfolio manager
with Landmark First National Bank. Mr. Motyl holds a B.S. degree in Finance from
Lehigh University and an M.B.A.from Pace University and is a Chartered Financial
Analyst. Mr.Oler, Vice President of TICI, is a portfolio manager and research
analyst whose research responsibilities include industry coverage of the global
non-life insurance industry and country coverage of Mexico and Greece. Before
joining the Templeton organization in 1996, Mr. Oler was a senior vice president
at Baring Asset Management, where he was responsible for Latin American
portfolio management and research. During his 11-year stay at Barings, he
followed European equities from the London office, then moved in 1989 to the
Boston office where he followed Canadian equities. Beginning in 1993 he devoted
his full time to following Latin stocks. Mr. Oler received a master of
philosophy degree in international relations from King's College, Cambridge
University, and a B.A. degree with honors from the University of Pennsylvania in
American history. He is a Chartered Financial Analyst.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 2 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so qualifies
it generally will not be subject to federal income taxes on amounts distributed
to Shareholders. In order to qualify as a regulated investment company, the Fund
must, among other things, meet certain source of income requirements. In
addition, the Fund must diversify its holdings so that, at the end of each
quarter of the taxable year, (a) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. Government securities, the securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of
U.S.Government securities, each U.S. Government agency or instrumentality is
treated as a separate issuer. Any securities issued, guaranteed, or insured (to
the extent so guaranteed or insured) by the U.S. Government or an
instrumentality of the U.S. Government are treated as a U.S. Government security
for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Asset Allocation Fund
Class 2 Shares
This Prospectus offers only Class 2 shares of Templeton Global Asset Allocation
Fund ("Fund"), a diversified series of Templeton Variable Products Series Fund
(the "Trust"), an open-end, management investment company. It contains
information that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks a high level of total return through a flexible policy of
investing in the following market segments: stocks of companies in any nation,
debt securities of companies and governments of any nation, and money market
instruments. The mix of investments among these three market segments will be
adjusted in an attempt to capitalize on total return potential produced by
changing economic conditions throughout the world. The Fund and its investment
manager, Templeton Investment Counsel, Inc. ("TICI" or the "Investment Manager")
may, from time to time, use various methods of selecting securities for the
Fund's portfolio, and may also employ and rely on independent or affiliated
sources of information and ideas in connection with the management of the Fund's
portfolio. There can be no assurance that the Fund will achieve its investment
objective.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under "Investment Restrictions" in the SAI, the Fund's Investment
Manager has complete flexibility in determining the amount and nature of stock,
debt securities or money market instruments in which the Fund may invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in
collateralized mortgage obligations and restricted securities, lend its
portfolio securities, and borrow money for investment purposes.
The Fund may purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes only and
not for speculation. It may engage in such transactions only if the total
contract value of the futures contracts does not exceed 20% of the Fund's total
assets. The Fund may also invest in forward foreign currency exchange contracts
and options on foreign currencies. (See "Description of Securities and
Investment Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the SAI. Those investment restrictions so
designated and the investment objective of the Fund are "fundamental policies"
of the Fund, which means that they may not be changed without a majority vote of
Shareholders of the Fund. With the exception of the Fund's investment objective
and those restrictions specifically identified as fundamental, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Board of Trustees may change them without
Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and use the various investment
techniques described below. Although these strategies are regularly used by some
investment companies and other institutional investors in various markets, some
of these strategies cannot at the present time be used to a significant extent
by the Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates represent
part ownership of a pool of mortgage loans on which interest and principal
payments are guaranteed by the Treasury. Principal is repaid monthly over the
term of the loan. Expected payments may be delayed due to the delays in
registering newly traded certificates. The mortgage loans will be subject to
normal principal amortization and may be prepaid prior to maturity. Reinvestment
of prepayments may occur at higher or lower rates than the original yield on the
certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") or A-1 or A-2 by Standard & Poor's Corporation ("S&P") or, if
not rated by Moody's or S&P, issued by companies having an outstanding debt
issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the Appendix
in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. As an operating policy, which may be changed by the Board of
Trustees without shareholder approval, the Fund will not invest more than [15%]
of its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. 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. Consistent with this limit the Fund will
not invest more than 10% of its total assets in defaulted debt securities, which
may be illiquid . Bonds rated BB or lower, commonly referred to as "junk bonds,"
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
may be in default. Issuers of bonds rated Ca may often be in default. Regardless
of rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by the Fund's Investment Manager to
determine that the planned investment is sound. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. Many debt obligations of foreign issuers, and
especially developing markets issuers, are either (i) rated below investment
grade or (ii) not rated by U.S. rating agencies so that their selection depends
on the Investment Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell stock index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. There is
no assurance that the Investment Manager's hedging strategies will be
successful.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. As an operating policy, which
may be changed by the Board of Trustees without Shareholder approval, the Fund
will not invest more than [15]% of its total assets in debt securities rated
lower than BBB by S&P or Baa by Moody's. 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager of the fixed income portion of
the Fund since 1993 is Thomas Latta, Vice President of Templeton Global Bond
Managers ("TGBM"), a division of TICI. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed markets
fixed income and has research responsibilities for the core European markets.
Mr. Latta is also responsible for internal fixed income systems development. Mr.
Latta began working in the securities industry in 1981. His experience includes
seven years with Merrill Lynch where he was part of an investment team to the
Saudi Arabian Monetary Authority in Riyadh, Saudi Arabia. While at Merrill
Lynch, Mr. Latta also acted as an advisor to investment managers concerning the
modeling and application of interest rate strategies in fixed income portfolios.
Neil Devlin and William T. Howard Jr., exercise secondary portfolio management
responsibilities with respect to the fixed income portion of the Fund. Mr.
Devlin, Executive Vice President of TGBM, joined the Templeton organization in
1987. Prior to that time, he was a portfolio manager and bond analyst with
Constitutional Capital Management of Boston, where he managed a portion of the
Bank of New England's pension money, a number of trust and corporate pension
accounts, and began and managed a mortgage-backed securities fund for the Bank.
Before that, Mr. Devlin was a bond trader and research analyst for the Bank of
New England. Mr. Wilkinson, Vice President of TGBM, joined the Templeton
organization in 1985 and is the senior portfolio manager for Franklin
Templeton's emerging markets fixed income group with research responsibilities
covering East Asia.
The lead portfolio manager for the equity portion of the Fund since 1995 is Gary
Clemons, Vice President of TICI. He is a research analyst with responsibility
for the financial services and telecommunications industry, as well as country
coverage of Argentina and Sweden. Prior to joining the Templeton organization in
1993, Mr. Clemons worked as a research analyst for Structured Asset Management
in New York, a subsidiary of Templeton International, where his duties included
management of a small capitalization fund. He holds an M.B.A. with an emphasis
on finance/investment banking from the University of Wisconsin and a B.S. from
the University of Nevada-Reno. Peter Nori and William T. Howard Jr., exercise
secondary portfolio management responsibilities for the equity portion of the
Fund. Mr. Nori, Vice President of the Investment Manager, is a research analyst
whose current responsibilities include covering data processing/software,
textile and apparel stocks. Mr. Nori completed Franklin's management training
program before moving into portfolio research in 1990 as an equity analyst and
co-portfolio manager of the Franklin Convertible Securities Fund. He holds a
B.S. degree in Finance and an M.B.A. with an emphasis in finance from the
University of San Francisco. Mr. Howard holds a BA in international studies from
Rhodes College and an MBA in finance from Emory University. He is a Chartered
Financial Analyst and a member of the Financial Analyst Society. Before joining
the Templeton Organization in 1993, Mr. Howard was a portfolio manager and
analyst with the Tennessee Consolidated Retirement System in Nashville,
Tennessee, where he was responsible for research and management of the
international equity portfolio, and specialized in the Japanese equity market.
As a portfolio manager and research analyst with Templeton, Mr. Howard's
research responsibilities include the transportation, shipping, machinery and
engineering industries worldwide. He is also responsible for country coverage of
both Japan and New Zealand.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.66% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 2shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
Templeton Variable Products Series Fund
Prospectus - May 1, 1997
Templeton Developing Markets Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Templeton Developing Markets Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT TECHNIQUES
RISK FACTORS
PURCHASE OF SHARES
NET ASSET VALUE
REDEMPTION OF SHARES
EXCHANGES
MANAGEMENT OF THE TRUST
BROKERAGE COMMISSIONS
DIVIDENDS AND DISTRIBUTIONS
FEDERAL INCOME TAX STATUS
OTHER INFORMATION
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
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 ervices 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 relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Manager may,
however, hedge where they believe it would be appropriate.
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. There is no assurance that the Investment Manager's hedging
strategies will be successful.
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. As a
non-fundamental policy, the Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. For more information on these risks and other
risks associated with Russian securities, please see "Investment Objectives and
Policies--Risk Factors" in the SAI.
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 D 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.
The market value of junk bonds tends to reflect individual developments
affecting the issuer to a greater extent than the market value of higher rated
obligations, which react primarily to fluctuations in the general level of
interest rates. Lower rated obligations tend to be more sensitive to economic
conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the rating service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
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
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Asset Management Ltd. ("Templeton Singapore") a
Singapore corporation with offices 7 Temasek Blvd. # 38-03, Suntec Tower One,
Singapore, 038987. Templeton Singapore manages the Fund's assets and makes
its investment decisions. Templeton Singapore also performs similar services
for other funds. Templeton Singapore is wholly owned by Resources, a publicly
owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together Templeton Singapore and its affiliates
manage over $179 billion in assets. The Templeton organization has been
investing globally since 1940. Templeton Singapore and its affiliates have
offices in Argentina, Australia, Bahamas, Canada, France, Germany, Hong Kong,
India, Italy, Luxembourg, Poland, Russia, Scotland, Singapore, South Africa,
U.S., and Vietnam. Please see "Investment Management and Other Services" and
"Brokerage Allocation" in the SAI for information on securities transactions
and a summary of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his
Bachelor's and Master's degrees from Boston University. He is a member of
several industry-related associations. Dr. Mobius joined the the Franklin
Templeton Group in 1987 and has managed the Developing Markets Fund from
inception.
H. Allan Lam
Portfolio Manager and Analyst
Templeton Asset Management Ltd.
Mr. Lam holds a Bachelors of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined the Franklin Templeton Group in 1987 and has
managed the Developing Markets Fund from inception.
Tom Wu
Director, Portfolio Manager, and Analyst
Templeton Asset Management Ltd.
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining the Franklin Templeton Group, in 1987,
he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has managed the
Developing Markets Fund from inception.
Dennis Lim
Vice President, Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. Prior to joining the Franklin Templeton
Group, in 1990, he worked for the Government of Singapore's Ministry of National
Development. He has managed the Fund since February 1996.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group in, 1994, he
worked for many years in the finance and banking industry. He has managed the
Fund since February 1996.
Tek-Khoan Ong
Portfolio Manager
Tempelton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a Bachelor
of Science degree in computing science and a Bachelor of Science degree, with
honors, both from Imperial College, University of London, UK. Prior to joining
the Franklin Templeton Group, in 1993, he worked for the Monetary Authority of
Singapore (Singapore's central bank)for five years. He has managed the Fund
since February 1996.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid [to
be supplied by amendment] of its average daily net assets in management fees.
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.
PORTFOLIO TRANSACTIONS. Templeton Singapore tries to obtain the best execution
on all transactions. If Templeton Singapore believes more than one broker or
dealer can provide the best execution, consistent with internal policies it may
consider research and related services and the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "Brokerage Allocation" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 2 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class 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
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Franklin Growth Investments Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Franklin Growth Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The primary investment objective of the Franklin Growth Investments Fund is
capital appreciation. Current income is only a secondary consideration in
selecting portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65% of
assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer favorable
possibilities for capital appreciation, but some of which may yield little or no
current income. The Fund's assets may be invested in shares of common or capital
stock traded on any national securities exchange or over-the-counter, in
convertible securities or, for temporary or defensive purposes, in cash and
money market instruments. From time to time, the Fund may hold significant cash
positions, consistent with its policy on temporary investments, until suitable
investment opportunities are available.
The Investment Manager will generally make long-term investments in equity
securities which have been selected based upon fundamental and quantitative
analysis. The Fund will invest predominantly in equity securities issued by
large-cap or mid-cap U.S. companies, which have market capitalizations of $1
billion or more. It may also invest in smaller capitalization companies, which
may be subject to different and greater risks, but there is no present intention
of investing more than 20% of the Fund's assets in such securities. As an
operating policy, the Fund currently intends to invest no more than 15% of its
assets in foreign securities, including Depository Receipts.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund does not currently intend to invest more than 5% of its assets in bonds
rated BB or lower by Standard & Poors or Ba or lower by Moody's, or in unrated
bonds of similar quality as determined by the Investment Manager, commonly
referred to as "junk bonds." Junk bonds are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. Higher yields
are generally available from securities in the lower rating categories of S&P or
Moody's. However, the values of lower rated securities generally fluctuate more
than those of higher rated securities. As a result, lower rated securities
involve greater risk of loss of income and principal than higher rated
securities. See "Risk Factors," below. For a description of debt securities
ratings, see the Appendix to the SAI.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTION CONTRACTS
The Fund may also write covered call options and purchase put options on
securities. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in Money Market Instruments. The Fund
may therefore invest up to 100% of its net assets in short-term debt securities
including, for example, U.S. Government Securities, bank obligations, and the
highest quality commercial paper, or in repurchase agreements, as described
above. The Fund may also invest in non-U.S. currency and short-term instruments
denominated in non-U.S.
currencies for temporary defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. The Investment Manager currently expects that such
investments will not exceed 15% of the Fund's assets. An investor should
consider carefully the risks involved in investing in securities issued by
companies and governments of foreign nations, which are in addition to the usual
risks inherent in domestic investments. These risks are often heightened for
investments in developing markets, including certain Eastern European countries.
See "Investment Objectives and Policies--Risk Factors" in the SAI. There is the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations (including, for example, withholding taxes
on interest and dividends) or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), foreign investment controls
on daily stock movements, default in foreign government securities, political or
social instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities 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.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as D 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. The Fund currently intends,
however, to invest no more than 5% of its total assets in debt securities rated
lower than BBB by S&P or 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
Options contracts are subject to special risk considerations and transaction
costs. A liquid secondary market for these 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 is based and movements in the securities or currency in the Fund's
portfolio or the currencies in which they are denominated. Successful use of
these contracts is further dependent on the ability of the Fund's Investment
Manager to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct. 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
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. , 777 Mariners Island Blvd., San
Mateo, California, 94404, is the Investment Manager. Advisers manages the
Fund's assets and makes its investment decisions. Advisers also performs
similar services for other funds. Advisers is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together Advisers and its affiliates manage over
$179 billion in assets. Please see "Investment Management and Other Services"
and "Brokerage Allocation" in the SAI for information on securities
transactions and a summary of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with the Franklin Templeton Group since
1989 and prior thereto was Vice President and General Manager of Aquila
Management. He will manage the Fund from inception.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams
College. He has been with the Franklin Templeton Group since 1965. Mr.
Palmieri will manage the Fund from inception.
Kei Yamamoto, CFA
Portfolio Manager
Franklin Advisers, Inc.
Ms. Yamamoto is a Chartered Financial Analyst and has a Master of Science
degree and a Bachelor of Science degree in material science and engineering
from the Massachusetts Institute of Technology. Prior to joining the Franklin
Templeton Group in 1994, Ms Yamamoto worked at Goldman Sachs & Co. as a
financial analyst and at Wasserstein Perella & Co. as an associate and vice
president. Ms Yamamoto will manage the fund from inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and will manage the Fund
from inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.60% of the combined average daily net assets
of the Fund, reduced to 0.50% of such assets in excess of $200 million, to 0.40%
of such assets in excess of $1.3 billion.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
For its services the Fund Administrator, receives a fee equivlant on an annual
basis to 0.15% of the combined average daily net assets of the Fund and other
funds in the Trust, reduced to 0.135% of such assets in excess of $200 million,
to 0.10% of such assets in excess of $700 million, and to 0.075% of such assets
in excess of $1.2 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Mutual Discovery Investments Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Mutual Discovery Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
APPENDIX.....................
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Mutual Discovery Securities Fund is capital
appreciation.
Portfolio Investments. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, and will
tend to invest a substantial portion of its assets in securities of small
capitalization issuers, which have market capitalizations of less than $1
billion. Securities of foreign or small cap issuers may be subject to different
and greater risks, as discussed below. The Fund may invest in securities that
are traded on U.S. or foreign exchanges, NASDAQ national market or in the
over-the-counter market. It may invest in any industry sector, although it will
not concentrate in any one industry. From time to time, the Fund may hold
significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation loan participations and trade claims, of debtor companies involved in
reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
Selection of Portfolio Investments. The Fund's general policy is to invest in
securities which, in the opinion of its Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of influencing
or controlling management, such as investing in a potential takeover or
leveraged buyout or investing in other entities engaged in such practices.
Foreign Investments. The Fund may purchase securities in any foreign country,
developed or undeveloped. The Fund presently does not intend to invest more than
5% of its assets in developing markets securities. Foreign investments may
include both voting and non-voting securities, sovereign debt and participation
in foreign government deals. The Fund's investments in foreign securities
involve risks related to currency fluctuations, market volatility, and economic,
social, and political uncertainty that are different from investing in similar
domestic securities. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS
INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED IN
DEVELOPING MARKETS. SEE "RISK FACTORS" BELOW AND IN THE SAI.
Currency Techniques. The Fund generally expects it will hedge against
currency risks to the extent that hedging is available. Currency hedging
techniques may include investments in foreign currency futures contracts,
options on foreign currencies or currency futures, forward foreign currency
exchange contracts ("forward contracts") and currency swaps, all of which
involve specialized risks. See "RISK FACTORS."
Risks Associated with Small Cap Investments. Securities of smaller companies,
particularly if they are unseasoned, present greater risks than securities of
larger, more established companies. The smaller companies in which the Fund
invests are often not well known, may often trade at a discount and may not be
followed by institutions. The companies may have relatively small revenues,
limited product lines, and a small share of the market for their products or
services. Small cap companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms, or they may
be developing or marketing new products or services for which markets are not
yet established and may never become established. Due to these and other
factors, small cap companies may suffer significant losses as well as realize
substantial growth, and investments in such companies tend to be more volatile
and are therefore speculative. Besides exhibiting greater volatility, small cap
company stocks may fluctuate independently of larger company stocks. See also
"Description of Securities Investment Techniques."
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "RISK
FACTORS" AND APPENDIX.
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities or for temporary 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. Leveraging by means of borrowing
will exaggerate the effect of any increase or decrease in the value of portfolio
securities on the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Higher yields are generally available from securities in the lower rating
categories of S&P or Moody's. However, the values of lower rated securities
generally fluctuate more than those of higher rated securities. As a result,
lower rated securities involve greater risk of loss of income and principal than
higher rated securities. See "Risk Factors," below. For a description of debt
securities ratings, see the Appendix.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
COMMERCIAL PAPER
The Fund may invest in commercial paper, regardless of its rating. Commercial
paper includes short-term unsecured promissory notes issued or guaranteed by
domestic or foreign corporations with a maximum maturity of 270 days. See the
Appendix in the SAI for a description of credit ratings.
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.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Investment Manager
may, however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
LOAN PARTICIPATIONS
The Fund may acquire loan participations in which it will purchase from a lender
a portion of a larger loan which the lender has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable the Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount, and trade at discounts to par value,
because of the borrower's credit problems. To the extent the borrower's credit
problems are resolved, the loan participations may appreciate in value. Such
loan participations, however, carry substantially the same risk as that for
defaulted debt obligations and may cause loss of the entire investment. Many
loan participations are illiquid and such participations will be included in the
Fund's percentage limitation for illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by governmental
institutions, such as the Resolution Trust Corporation or the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation or may include
supranational organizations such as the World Bank. When the Fund purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTIONS AND FUTURES CONTRACTS
The Fund may invest in purchase and sell exchange-listed and over-the-counter
put and call options on securities, equity and fixed-income indices and other
financial instruments, and may purchase and sell financial futures contracts and
options thereon. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
The Fund will not purchase or sell futures contracts or options on futures
contracts if immediately thereafter the aggregate amount of initial margin
deposits on all the futures positions of the Fund and premiums paid on options
on futures contracts would exceed 5% of the market value of the total assets of
the Fund.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses. A detailed
discussion of these transactions and their risks appears in the SAI. The Fund
does not currently expect to make significant use of these transactions, except
to manage currency risk.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in money market instruments and
short-term debt securities including, for example, U.S. Government Securities,
bank obligations, and the highest quality commercial paper, or in repurchase
agreements, as described above. The Fund may also invest in non-U.S. currency
and short-term instruments denominated in non-U.S. currencies for temporary
defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities and debt obligations on a "when-issued" or
"delayed delivery" basis (in the case of GNMA Certificates, a "To-Be-Announced"
basis). Such securities are subject to market fluctuations prior to delivery to
the Fund and generally do not earn interest until their scheduled delivery date.
When the Fund is the buyer in such transactions, it will segregate cash or
liquid securities, having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage.
Nonetheless, purchases of securities on such basis may involve more risk than
other types of purchases, for example, counterparty delivery risk. If the seller
fails to complete the transaction, the Fund may miss a price or yield considered
advantageous.
RISK FACTORS
GENERAL
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
FOREIGN INVESTMENTS
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
LOWER RATED DEBT OBLIGATIONS
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 D 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 the Appendix for
descriptions of debt securities rated by S&P and 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
SMALL CAPITALIZATION ISSUERS
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
OTHER RISKS
Successful use of forward contracts, options and futures contracts is subject to
special risk considerations and transaction costs. A liquid secondary market for
forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGERS
INVESTMENT MANAGER. Franklin Mutual Advisers, Inc., 51 John F. Kennedy
Parkway, Short Hills, New Jersey, 07078 is the Investment Adviser. Franklin
Mutual manages the Fund's assets and makes its investment decisions. Franklin
Mutual also performs similar services for other funds. Franklin Mutual is
wholly owned by Resources, a publicly owned company engaged in the financial
services industry trough its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together Franklin
Mutual and its affiliates manage over $179 billion in assets. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the
SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Mutual Discovery Securities Fund and
Mutual Shares Securities Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Stanford University Law School. Prior to November 1996, he was a
Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. Mr. Langerman is also a Director
of Sunbeam Oster since 1990, Lancer Industries since 1994 and N.M.M.S.p.A.
since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR
L.L.C. since 1995. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine Securities Corporation, an investment adviser acquired by Resources,
for at least 5 years. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.80% of the combined average daily net
assets of the Fund.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
For its services the Fund Administrator, receives a fee equivlant on an annual
basis to 0.15% of the combined average daily net assets of the Fund and other
funds in the Trust, reduced to 0.135% of such assets in excess of $200 million,
to 0.10% of such assets in excess of $700 million, and to 0.075% of such assets
in excess of $1.2 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC 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 obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Mutual Shares Investments Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Mutual Shares Investments Fund
("Fund"), a diversified series of Templeton Variable Products Series Fund (the
"Trust"), an open-end, management investment company. It contains information
that a prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
APPENDIX..........
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The principal investment objective of the Mutual Shares Securities Fund is
capital appreciation, with income as a secondary objective.
Portfolio Investments. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, including
smaller capitalization companies, which may be subject to different and greater
risks. See "Common Investment Methods and Risks, Smaller Capitalization
Issuers." It will tend to invest, however, in securities of issuers with market
capitalizations in excess of $500 million. It may invest in securities that are
traded on U.S. or foreign exchanges, NASDAQ national market or in the
over-the-counter market. It may invest in any industry sector, although it will
not concentrate in any one industry. From time to time, the Fund may hold
significant cash positions, consistent with its policy on temporary investments,
until suitable investment opportunities are available.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation, loan participations and trade claims, of debtor companies involved
in reorganization or financial restructuring, some of which may have very long
maturities. Some of the indebtedness is illiquid.
Selection of Portfolio Investments. The Fund's general policy is to invest in
securities which, in the opinion of the Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of influencing
or controlling management, such as investing in a potential takeover or
leveraged buyout or investing in other entities engaged in such practices.
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's; however, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "RISK
FACTORS" AND APPENDIX.
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
Foreign Investments. Although the Fund reserves the right to purchase securities
in any foreign country, developed or undeveloped, the Fund's current investment
strategy is to invest primarily in domestic securities, with a significant
portion, but generally less than 50%, of its total assets in foreign securities,
including sponsored or unsponsored Depository Receipts. The Fund presently does
not intend to invest more than 5% of its assets in developing markets
securities. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals. The
Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "RISK Factors" BELOW AND THE SAI.
Currency Techniques. The Fund generally expects it will hedge against currency
risks to the extent that hedging is available. Currency hedging techniques may
include investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
("forward contracts") and currency swaps, all of which involve specialized
risks. See "RISK FACTORS."
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Risk Factors," and in the SAI, the Fund may
also loan its portfolio securities; enter into repurchase transactions; purchase
securities and debt obligations on a "when-issued" or "delayed delivery" basis;
invest in restricted or illiquid securities; purchase and sell exchange-listed
and over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; and engage in other activities specifically
identified for this Fund.
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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its net assets to increase its
holdings of portfolio securities or for temporary 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. Leveraging by means of borrowing
will exaggerate the effect of any increase or decrease in the value of portfolio
securities on the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Similar to a common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
Bonds rated BB or lower, commonly referred to as "junk bonds," are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Higher yields are generally available from securities in the lower rating
categories of S&P or Moody's. However, the values of lower rated securities
generally fluctuate more than those of higher rated securities. As a result,
lower rated securities involve greater risk of loss of income and principal than
higher rated securities. See "Risk Factors," below. For a description of debt
securities ratings, see the Appendix.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs "pass-through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
COMMERCIAL PAPER
The Fund may invest in commercial paper, regardless of its rating. Commercial
paper includes short-term unsecured promissory notes issued or guaranteed by
domestic or foreign corporations with a maximum maturity of 270 days. See the
Appendix in the SAI for a description of credit ratings.
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.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors. With respect to debt securities, the Investment Manager, may from
time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. The Investment Manager generally
does not actively hedge currency positions with respect to equity securities,
believing that the costs outweigh the potential benefits. The Investment Manager
may, however, hedge where they believe it would be appropriate.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
LOAN PARTICIPATIONS
The Fund may acquire loan participations in which it will purchase from a lender
a portion of a larger loan which the lender has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable the Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount, and trade at discounts to par value,
because of the borrower's credit problems. To the extent the borrower's credit
problems are resolved, the loan participations may appreciate in value. Such
loan participations, however, carry substantially the same risk as that for
defaulted debt obligations and may cause loss of the entire investment. Many
loan participations are illiquid and such participations will be included in the
Fund's percentage limitation for illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by governmental
institutions, such as the Resolution Trust Corporation or the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation or may include
supranational organizations such as the World Bank. When the Fund purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
OPTIONS AND FUTURES CONTRACTS
The Fund may invest in purchase and sell exchange-listed and over-the-counter
put and call options on securities, equity and fixed-income indices and other
financial instruments, and may purchase and sell financial futures contracts and
options thereon. 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 premiums paid for
such options would exceed 5% of its total assets at the time of purchase.
The Fund will not purchase or sell futures contracts or options on futures
contracts if immediately thereafter the aggregate amount of initial margin
deposits on all the futures positions of the Fund and premiums paid on options
on futures contracts would exceed 5% of the market value of the total assets of
the Fund.
In general, the Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful. In
addition, these transactions may expose the Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses. A detailed
discussion of these transactions and their risks appears in the SAI. The Fund
does not currently expect to make significant use of these transactions, except
to manage currency risk.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable.
No restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 15% of the Fund's total assets. Such restriction shall not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. For additional details,
see the SAI.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, the Fund may establish a
temporary defensive position by investing in money market instruments and
short-term debt securities including, for example, U.S. Government Securities,
bank obligations, and the highest quality commercial paper, or in repurchase
agreements, as described above. The Fund may also invest in non-U.S. currency
and short-term instruments denominated in non-U.S. currencies for temporary
defensive purposes.
Any decision to withdraw substantially, and, for a sustained period of time,
from the Fund's investment policies based on its investment objectives, as
described above, will be reviewed by the Board of Trustees. It is not possible
to predict with any certainty when or for how long the Fund will employ
defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities and debt obligations on a "when-issued" or
"delayed delivery" basis (in the case of GNMA Certificates, a "To-Be-Announced"
basis). Such securities are subject to market fluctuations prior to delivery to
the Fund and generally do not earn interest until their scheduled delivery date.
When the Fund is the buyer in such transactions, it will segregate cash or
liquid securities, having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage.
Nonetheless, purchases of securities on such basis may involve more risk than
other types of purchases, for example, counterparty delivery risk. If the seller
fails to complete the transaction, the Fund may miss a price or yield considered
advantageous.
RISK FACTORS
GENERAL
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
FOREIGN INVESTMENTS
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securities market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read this
section in detail. As a non-fundamental policy, the Fund will limit investments
in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increase risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
LOWER RATED DEBT OBLIGATIONS
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 D 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 the Appendix for
descriptions of debt securities rated by S&P and 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. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and a Fund's ability to dispose of particular issues, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
SMALL CAPITALIZATION ISSUERS
The Fund may invest in relatively new or unseasoned companies which are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These are typically companies which have a market capitalization of
less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the net asset value of a Fund
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks.
OTHER RISKS
Successful use of forward contracts, options and futures contracts is subject to
special risk considerations and transaction costs. A liquid secondary market for
forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGERS
INVESTMENT MANAGER. Franklin Mutual Advisers, Inc., 51 John F. Kennedy
Parkway, Short Hills, New Jersey, 07078 is the Investment Adviser. Franklin
Mutual manages the Fund's assets and makes its investment decisions. Franklin
Mutual also performs similar services for other funds. Franklin Mutual is
wholly owned by Resources, a publicly owned company engaged in the financial
services industry trough its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together Franklin
Mutual and its affiliates manage over $179 billion in assets. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the
SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
PORTFOLIO MANAGEMENT. The following persons are primarily responsible for the
day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Mutual Discovery Securities Fund and
Mutual Shares Securities Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Stanford University Law School. Prior to November 1996, he was a
Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. Mr. Langerman is also a Director
of Sunbeam Oster since 1990, Lancer Industries since 1994 and N.M.M.S.p.A.
since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR
L.L.C. since 1995. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine Securities Corporation, an investment adviser acquired by Resources,
for at least 5 years. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.80% of the combined average daily net
assets of the Fund.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
For its services the Fund Administrator, receives a fee equivlant on an annual
basis to 0.15% of the combined average daily net assets of the Fund and other
funds in the Trust, reduced to 0.135% of such assets in excess of $200 million,
to 0.10% of such assets in excess of $700 million, and to 0.075% of such assets
in excess of $1.2 billion.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC 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 obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Stock Fund
CLASS 1 SHARES
This Prospectus offers only Class 1 shares of Templeton Stock Fund ("Fund"), a
diversified series of Templeton Variable Products Series Fund (the "Trust"), an
open-end, management investment company. It contains information that a
prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 1 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
FINANCIAL HIGHLIGHTS .................. T-2
INVESTMENT OBJECTIVE AND POLICIES .... T-2
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES ............. T-3
RISK FACTORS .......................... T-5
PURCHASE OF SHARES .................... T-6
NET ASSET VALUE ....................... T-7
REDEMPTION OF SHARES ............ T-7
EXCHANGES ....................... T-7
MANAGEMENT OF THE TRUST ......... T-7
BROKERAGE COMMISSIONS ........... T-9
DIVIDENDS AND DISTRIBUTIONS .... T-9
FEDERAL INCOME TAX STATUS ...... T-9
OTHER INFORMATION ............... T-10
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Trust's independent auditors. Their
audit report for each of the last five fiscal years, appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1996. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
(Financial Highlights to be added in a later filing)
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital growth through a policy of investing
primarily in common stocks issued by companies, large and small, in various
nations throughout the world. In the pursuit of its investment objective, the
Fund will normally maintain at least 65% of its assets in common and preferred
stocks. The Fund may also invest in securities convertible into common stocks
rated in any category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody"s') and securities which are unrated by any
rating agency. See the Appendix in the Statement of Additional Information for a
description of the S&P and Moody's ratings. Current income will usually be a
less significant factor in selecting investments for the Fund. The Fund will
invest predominantly in equity securities issued by large-cap and mid-cap
companies. Large-cap companies are those which have market capitalizations of $5
billion or more; mid-cap companies are those which have market capitalizations
of $1 billion to $5 billion. It may also invest to a lesser degree in smaller
capitalization companies, which may be subject to different and greater risks.
See "Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a "when-issued" basis, invest in restricted securities,
such as private placements, borrow money for investment purposes and lend its
portfolio securities. (See "Description of Securities and Investment
Techniques.")
The Fund may also purchase and sell stock index futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets. (See "Description of Securities and Investment
Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and also in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and use the various investment
techniques described below. Although these strategies are regularly used by some
investment companies and other institutional investors in various markets, some
of these strategies cannot at the present time be used to a significant extent
by the Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates represent
part ownership of a pool of mortgage loans on which interest and principal
payments are guaranteed by the Treasury. Principal is repaid monthly over the
term of the loan. Expected payments may be delayed due to the delays in
registering newly traded certificates. The mortgage loans will be subject to
normal principal amortization and may be prepaid prior to maturity. Reinvestment
of prepayments may occur at higher or lower rates than the original yield on the
certificates.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in bankers'
acceptances, which are negotiable drafts or bills of exchange normally drawn by
an importer or exporter to pay for specific merchandise and which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. The Fund may invest in
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion. The Fund may
also invest in certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
Also, for hedging purposes only, the Fund may purchase and sell stock index
futures contracts. An index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and at the end of the contract period.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in currency valuations will affect the price of the Shares
of the Fund. History reflects both decreases and increases in stock markets, the
prevailing rate of interest, and currency valuations, and these may reoccur
unpredictably in the future. Additionally, investment decisions made by the
Investment Manager will not always be profitable or prove to have been correct.
The Fund is not intended as a complete investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there is
less publicly available information about issuers than is available in reports
about companies in the United States. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to United States companies. The Fund may encounter difficulties or be
unable to vote proxies, exercise shareholder rights, pursue legal remedies, and
obtain judgments in foreign courts. These considerations generally are more of a
concern in developing countries, where the possibility of political instability
(including revolution) and dependence on foreign economic assistance may be
greater than in developed countries. Investments in companies domiciled in
developing countries therefore may be subject to potentially higher risks than
investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securites market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund may invest in companies with relatively small revenues and limited
product lines. Small companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. 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 or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also, as a fundamental
policy, not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid . Bonds rated BB or lower, commonly referred
to as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. Issuers of bonds rated Ca may often be in
default. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by the Fund's
Investment Manager to determine that the planned investment is sound. Unrated
debt securities are not necessarily of lower quality than rated securities but
they may not be attractive to as many buyers. Many debt obligations of foreign
issuers, and especially developing markets issuers, are either (i) rated below
investment grade or (ii) not rated by U.S. rating agencies so that their
selection depends on the Investment Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
Successful use of stock index futures contracts is subject to special risk
considerations and transaction costs. A liquid secondary market for futures
contracts may not be available when a position is sought to be closed.
Successful use of futures contracts is further dependent on the ability of the
Fund's Investment Manager to correctly predict movements in the securities
markets and no assurance can be given that its judgment will be correct.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions. Please
refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 1 shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for the Fund since 1995 is
Mark R. Beveridge. Mr. Beveridge, Vice President of TICI, joined the
Templeton organization in 1985. He has responsibility for the industrial
component appliances/household durables industries, and has market coverage
of Argentina, Denmark and Thailand. Prior to joining the Templeton
organization, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He has a Bachelors Degree in Business
Administration with emphasis in finance from the University of Miami.
William T. Howard Jr., Vice President of TICI and Howard J. Leonard, Senior Vice
President of TICI, exercise secondary portfolio management responsibilities. Mr.
Howard holds a BA in international studies from Rhodes College and an MBA in
finance from Emory University. He is a Chartered Financial Analyst and a member
of the Financial Analyst Society. Before joining the Templeton Organization in
1993, Mr. Howard was a portfolio manager and analyst with the Tennessee
Consolidated Retirement System in Nashville, Tennessee, where he was responsible
for research and management of the international equity portfolio, and
specialized in the Japanese equity market. As a portfolio manager and research
analyst with Templeton, Mr. Howard's research responsibilities include the
transportation, shipping, machinery and engineering industries worldwide. He is
also responsible for country coverage of both Japan and New Zealand. He has
managed the Fund since June 1996. Mr. Leonard has research responsibilities for
the global forest products, money management and airline industries, and
coverage of Indonesia, Switzerland, Brazil and India. Prior to joining the
Templeton organization in 1989, Mr. Leonard was director of investment research
at First Pennsylvania Bank, where he was responsible for equity and fixed income
research activities and its proxy voting service for large pension plan
sponsors. He also previously worked at Provident National Bank as a security
analyst. Mr. Leonard holds a B.B.A. in Finance and Economics from Temple
University.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 1 shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS -- May 1, 1997
Templeton Stock Fund
CLASS 2 SHARES
This Prospectus offers only Class 2 shares of Templeton Stock Fund ("Fund"), a
diversified series of Templeton Variable Products Series Fund (the "Trust"), an
open-end, management investment company. It contains information that a
prospective investor should know before investing.
Shares of the Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Separate Accounts invest in shares of the Fund in accordance with allocation
instructions received from owners of the Contracts. Such allocation rights are
described further in the accompanying prospectus for the Separate Accounts.
Certain series and classes of the Trust are not available as an investment
vehicle for all Contracts. A purchaser of a Contract should refer to the
Separate Account prospectus for his or her Contract for information as to which
series and classes of the Trust are available for investment. First available on
May 1, 1997, the Fund's Class 2 shares are offered to Separate Accounts at net
asset value and are subject to a Distribution Plan. For more information about
the Fund's multiclass structure, see "Other Information Capitalization and
Voting Rights," in this Prospectus.
CLASS 2 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.
A Statement Of Additional Information ("SAI") dated May 1, 1997, 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 the Trust, 700 Central Avenue, ST. Petersburg, Florida
33701 or by calling 1-800-774-5001 OR 1-813-823-8712.
TABLE OF CONTENTS PAGE
- --------------------------------------- ---------
INVESTMENT OBJECTIVE AND POLICIES ....
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES .............
RISK FACTORS ..........................
PURCHASE OF SHARES ....................
NET ASSET VALUE .......................
REDEMPTION OF SHARES ............
EXCHANGES .......................
MANAGEMENT OF THE TRUST .........
BROKERAGE COMMISSIONS ...........
DIVIDENDS AND DISTRIBUTIONS ....
FEDERAL INCOME TAX STATUS ......
OTHER INFORMATION ...............
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital growth through a policy of investing
primarily in common stocks issued by companies, large and small, in various
nations throughout the world. In the pursuit of its investment objective, the
Fund will normally maintain at least 65% of its assets in common and preferred
stocks. The Fund may also invest in securities convertible into common stocks
rated in any category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody"s') and securities which are unrated by any
rating agency. See the Appendix in the Statement of Additional Information for a
description of the S&P and Moody's ratings. Current income will usually be a
less significant factor in selecting investments for the Fund. The Fund will
invest predominantly in equity securities issued by large-cap and mid-cap
companies. Large-cap companies are those which have market capitalizations of $5
billion or more; mid-cap companies are those which have market capitalizations
of $1 billion to $5 billion. It may also invest to a lesser degree in smaller
capitalization companies, which may be subject to different and greater risks.
See "Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a "when-issued" basis, invest in restricted securities,
such as private placements, borrow money for investment purposes and lend its
portfolio securities. (See "Description of Securities and Investment
Techniques.")
The Fund may also purchase and sell stock index futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets. (See "Description of Securities and Investment
Techniques.")
The Fund is subject to investment restrictions that are described under the
heading "Investment Restrictions" in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of the
Fund are "fundamental policies" of the Fund, which means that they may not be
changed without a majority vote of Shareholders of the Fund. With the exception
of the Fund's investment objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without Shareholder approval.
Certain types of investments and investment techniques are described in greater
detail under "Description of Securities and Investment Techniques" in this
Prospectus and also in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and use the various investment
techniques described below. Although these strategies are regularly used by some
investment companies and other institutional investors in various markets, some
of these strategies cannot at the present time be used to a significant extent
by the Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates represent
part ownership of a pool of mortgage loans on which interest and principal
payments are guaranteed by the Treasury. Principal is repaid monthly over the
term of the loan. Expected payments may be delayed due to the delays in
registering newly traded certificates. The mortgage loans will be subject to
normal principal amortization and may be prepaid prior to maturity. Reinvestment
of prepayments may occur at higher or lower rates than the original yield on the
certificates.
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in bankers'
acceptances, which are negotiable drafts or bills of exchange normally drawn by
an importer or exporter to pay for specific merchandise and which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. The Fund may invest in
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion. The Fund may
also invest in certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ("illiquid assets") will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
Also, for hedging purposes only, the Fund may purchase and sell stock index
futures contracts. An index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and at the end of the contract period.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in currency valuations will affect the price of the Shares
of the Fund. History reflects both decreases and increases in stock markets, the
prevailing rate of interest, and currency valuations, and these may reoccur
unpredictably in the future. Additionally, investment decisions made by the
Investment Manager will not always be profitable or prove to have been correct.
The Fund is not intended as a complete investment program.
The Fund is authorized to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "Investment Objectives and
Policies--Risk Factors" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there is
less publicly available information about issuers than is available in reports
about companies in the United States. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to United States companies. The Fund may encounter difficulties or be
unable to vote proxies, exercise shareholder rights, pursue legal remedies, and
obtain judgments in foreign courts. These considerations generally are more of a
concern in developing countries, where the possibility of political instability
(including revolution) and dependence on foreign economic assistance may be
greater than in developed countries. Investments in companies domiciled in
developing countries therefore may be subject to potentially higher risks than
investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks associated
with the Russian securites market are discussed more fully in the SAI under the
caption "Investment Objectives and Policies-Risk Factors" and investors should
read this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European countries,
which involves special risks that are described under "Investment Objectives and
Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Fund may invest in companies with relatively small revenues and limited
product lines. Small companies may lack depth of management, they may be unable
to internally generate funds necessary for growth or potential development or to
generate such funds through external financing on favorable terms. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D 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. 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 or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. The Fund will also, as a fundamental
policy, not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid . Bonds rated BB or lower, commonly referred
to as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. Issuers of bonds rated Ca may often be in
default. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by the Fund's
Investment Manager to determine that the planned investment is sound. Unrated
debt securities are not necessarily of lower quality than rated securities but
they may not be attractive to as many buyers. Many debt obligations of foreign
issuers, and especially developing markets issuers, are either (i) rated below
investment grade or (ii) not rated by U.S. rating agencies so that their
selection depends on the Investment Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption "Risk
Factors" in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
Successful use of stock index futures contracts is subject to special risk
considerations and transaction costs. A liquid secondary market for futures
contracts may not be available when a position is sought to be closed.
Successful use of futures contracts is further dependent on the ability of the
Fund's Investment Manager to correctly predict movements in the securities
markets and no assurance can be given that its judgment will be correct.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2shares of the Fund are offered on a continuous basis at their 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 these shares directly from the
Fund. Please read the prospectus of the insurance company Separate Account for
more information on the purchase of Fund's Class 2shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
insurance company and other variable contracts of unaffiliated insurance
companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between separate accounts of different
insurance companies, 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 Fund due to differences in tax treatment, the
management of investments, or other considerations. If such a conflict were to
occur, one of the Separate Accounts might withdraw its investment in the Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2shares of the Fund may
be subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the NYSE generally 4:00 p.m., Eastern time. The Net Asset
Value of all outstanding shares of each class of the Fund is calculated on a pro
rata basis. It is based on each class' proportionate participation in the Fund,
determined by the value of the shares of each class. To calculate the Net Asset
Value per share of each class, the assets of each class are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares of the class outstanding. The assets in the Fund's
portfolio are valued as described under "Purchase, Redemption and Pricing of
Shares" in the SAI.
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.
If a substantial portion of the Fund's shares should be redeemed within a short
period, the Fund might have to liquidate portfolio securities it might otherwise
hold and also incur the additional costs related to such transactions.
Please refer to the prospectus of your insurance company's Separate Account for
information on how to redeem Shares of the Fund.
EXCHANGES
Class 2shares of the Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one fund
and a purchase of shares of one or more of the other funds and are effected at
the respective net asset value per share of the class 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 BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGER. Templeton Investment Counsel, Inc., is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. TICI also
performs similar services for other funds. TICI is wholly owned by Resources, a
publicly owned company engaged in the financial services industry trough its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together TICI and its affiliates manage over $179
billion in assets. The Templeton organization has been investing globally since
1940. TICI and its affiliates have offices in Argentina, Australia, Bahamas,
Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia,
Scotland, Singapore, South Africa, U.S., and Vietnam. Please see "Investment
Management and Other Services" and "Brokerage Allocation" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for the Fund since 1995 is
Mark R. Beveridge. Mr. Beveridge, Vice President of TICI, joined the
Templeton organization in 1985. He has responsibility for the industrial
component appliances/household durables industries, and has market coverage
of Argentina, Denmark and Thailand. Prior to joining the Templeton
organization, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He has a Bachelors Degree in Business
Administration with emphasis in finance from the University of Miami.
William T. Howard Jr., Vice President of TICI and Howard J. Leonard, Senior Vice
President of TICI, exercise secondary portfolio management responsibilities. Mr.
Howard holds a BA in international studies from Rhodes College and an MBA in
finance from Emory University. He is a Chartered Financial Analyst and a member
of the Financial Analyst Society. Before joining the Templeton Organization in
1993, Mr. Howard was a portfolio manager and analyst with the Tennessee
Consolidated Retirement System in Nashville, Tennessee, where he was responsible
for research and management of the international equity portfolio, and
specialized in the Japanese equity market. As a portfolio manager and research
analyst with Templeton, Mr. Howard's research responsibilities include the
transportation, shipping, machinery and engineering industries worldwide. He is
also responsible for country coverage of both Japan and New Zealand. He has
managed the Fund since June 1996. Mr. Leonard has research responsibilities for
the global forest products, money management and airline industries, and
coverage of Indonesia, Switzerland, Brazil and India. Prior to joining the
Templeton organization in 1989, Mr. Leonard was director of investment research
at First Pennsylvania Bank, where he was responsible for equity and fixed income
research activities and its proxy voting service for large pension plan
sponsors. He also previously worked at Provident National Bank as a security
analyst. Mr. Leonard holds a B.B.A. in Finance and Economics from Temple
University.
MANAGEMENT FEES. For the fiscal year ended December 31, 1996, the Fund paid
0.50% of its average daily net assets in management fees.
PORTFOLIO TRANSACTIONS. TICI tries to obtain the best execution on all
transactions. If TICI believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERVICES. Templeton Funds Annuity Company, 700 Central
Avenue, St. Petersburg, Florida 33701, telephone (800) 774-5001 or (813)
Fund.712, provides certain administrative services and facilities for the
During the fiscal year ended December 31, 1996, administration fees totaling (to
be supplied by amendment)% of the average daily net assets of the Trust were
paid to TFAC. Please see "Fund Administrator" in the SAI for more information.
TOTAL EXPENSES. During the fiscal year ended December 31, 1996, the total fund
operating expenses were (to be supplied by amendment)% of the daily net assets
of Class 2shares.
DISTRIBUTOR. The Trust's principal underwriter is Franklin Templeton
Distributors, Inc., 700 Central Avenue, St. Petersburg, Florida 33701, toll
free telephone (800) 292-9293.
DISTRIBUTION PLAN
Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan," under which it
may pay Distributors, the Insurance Company or others for activities primarily
intended to sell Class 2 shares or contracts offering the Class 2 shares.
Payments made under the Plan may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution related
expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as the Fund or a Contract may require, or maintaining customer accounts and
records. Payments under the Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
per year of Class 2's average daily net assets. Please see the SAI for
additional information.
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. Dividends and capital gains are calculated and distributed the same way
for each class of shares. The amount of any income dividends per share will
differ for each class, however, generally due to the difference in the
applicable 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the same class of the Fund, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Fund will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by the Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Reference is made to
the prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described in the Prospectus,
or that the Trust will not have to change the Fund's investment objective or
investment policies. While the Fund's investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding Shares, the
Trustees have reserved the right to modify the investment policies of the Fund
as necessary to prevent any such prospective rules and regulations from causing
the contract owners to be considered the owners of the Shares of the Fund
underlying the Separate Account.
OTHER INFORMATION
THE FUND'S ORGANIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of nine separately managed funds. Each class of each fund
in the Trust is offered through a separate prospectus and is sold only to
insurance company separate accounts to serve as an investment vehicle for
variable annuity and variable life insurance contracts. The Templeton Money
Market Fund has a single class of shares. The other eight funds ("Multiclass
Funds") began offering two classes of shares, Class 1 and Class 2, on May 1,
1997; all shares of the Multiclass Funds purchased before that date are
considered Class 1 shares. Class 2 shares of the Multiclass Funds are subject to
a Rule 12b-1 fees of 0.25% (0.15% in the case of the Bond Fund) per year of
Class 2's average daily net assets. Rule 12b-1 fees will affect performance of
Class 2 Shares. Shares of the Templeton Money Market Fund and Class 1 Shares of
the Multiclass Funds are not subject to Rule 12b-1 fees. The Board of Trustees
may establish additional funds or classes 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. The
Declaration of Trust, however, 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.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of the fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by the 1940 Act.
Each share of each class of a 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.
The Separate Account, as Shareholder of the Trust, is entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Account will generally value its shares in
accordance with instructions received from owners of the variable contracts. See
the prospectus for the Separate Account for more information regarding the
pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
From time to time, each class of the Fund advertises its performance.
Performance information for a class of the Fund will generally not be advertised
unless accompanied by comparable performance information for a Separate Account
to which the Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
Quotations of yield or total return for a class of 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.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997, IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON MONEY MARKET
FUND, AND THE SEPARATE CLASS 1 AND CLASS 2 PROSPECTUSES OF TEMPLETON BOND FUND,
TEMPLETON STOCK FUND, TEMPLETON ASSET ALLOCATION FUND, TEMPLETON INTERNATIONAL
FUND, FRANKLIN GROWTH INVESTMENTS FUND, MUTUAL DISCOVERY INVESTMENTS FUND,
MUTUAL SHARES INVESTMENT FUND, AND TEMPLETON DEVELOPING MARKETS FUND. EACH
PROSPECTUS IS DATED MAY 1, 1997, MAY BE AMENDED FROM TIME TO TIME, AND MAY BE
OBTAINED WITHOUT CHARGE UPON REQUEST TO FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 292-9293.
TABLE OF CONTENTS
General Information and History - Investment Management Agreements
Investment Objectives and Policies - Management Fees
- - Investment Policies - The Investment Managers
- - Debt Securities - Fund Administrator
- - Diversification - Custodian
- - Structured Investments - Legal Counsel
- - Futures Contracts - Independent Accountants
- - Foreign Currency Hedging - Reports to Shareholders
Transactions
- - Options on Securities or Brokerage Allocation
Indices
- -Short Sales - Portfolio Turnover
- - Stock Index Futures Contracts Purchase, Redemption and Pricing
- - Reverse Repurchase Agreements of Shares
- - Risk Factors - Redemptions in Kind
- Class 2 Distribution Plan
Investment Restrictions Tax Status
Trading Policies Description of Shares
- - Personal Securities Transactions Yield and Performance
Information
Management of the Trust Financial Statements
Trustee Compensation Appendix - Corporate Bond.
Preferred Stock and Commercial
Paper Ratings
Principal Shareholders
Investment Management and Other
Services
GENERAL INFORMATION AND HISTORY
Templeton Variable Products Series Fund (the "Trust") was organized as a
Massachusetts business trust on February 25, 1988 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company. The Trust currently has nine series of Shares:
Templeton Money Market ("Money Market") Fund, Templeton Bond ("Bond") Fund
Templeton Stock (`Stock") Fund, Templeton Asset Allocation("Asset Allocation")
Fund, Templeton Developing Markets ("Developing Markets") Fund, Franklin Growth
Investments ("Growth") Fund, Mutual Discovery Investments ("Mutual Discovery")
Fund, Mutual Shares Investments ("Mutual Shares") Fund and Templeton
International ("International") Fund (collectively, the "Funds"). Each Fund,
except the Money Market Fund, has two classes of shares, Class 1 and Class 2.
Each class of each Fund has a separate prospectus. All shares of the Funds are
sold only to insurance company separate accounts to serve as the investment
vehicle for certain variable annuity and life insurance contracts. Not all of
the Funds or Classes are available as an investment vehicle for all contracts.
Please refer to the contract prospectus for information concerning the
availability of each class of each Fund.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The investment objective and policies of each Fund
are described in each Fund's Prospectus under the heading "Investment
Objective and Policies."
DEBT SECURITIES. Each Fund may invest in debt securities to the extent
provided in the Fund's prospectus. The market value of debt securities generally
varies in response to changes in interest rates and the financial condition of
each issuer. During periods of declining interest rates, the value of debt
securities general increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. These changes in market
value will be reflected in a Fund's net asset value.
Bonds rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or
BB or lower by Standard & Poor's Corporation("S&P") are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. For a full description of each debt securities
rating, see the Appendix.
Although they may offer higher yields than do higher rated securities, low
rated and unrated debt securities generally involve greater volatility of price
and risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a Fund to obtain accurate market
quotations for the purposes of valuing a Fund's portfolio. Market quotations are
generally available on many low rated or unrated securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the credit
worthiness issuers of low rated debt securities may be more complex than for
issuers of higher rated securities, and the ability of a Fund to achieve its
investment objective may, to the extent of investment in low rated debt
securities, be more dependent upon such credit worthiness analysis than would be
the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, a Fund may incur additional expenses to seek
recovery.
DIVERSIFICATION. Each Fund intends to diversify its investments to meet
the requirements under Section 5 of the 1940 Act, under Section 851 of the Code
relating to regulated investment companies, under Section 817 of the Code
relating to the treatment of variable contracts issued by insurance companies,
and under a certain state's staff guidelines on foreign investments.
As diversified funds under the 1940 Act, each diversified Fund may not, with
respect to 75% of its total assets, purchase the securities of any one issuer
(except U.S. Government Securities) if more than 5% of the value of the Fund's
assets would be invested in such issuer.
In order to comply with the diversification requirements under section 851 of
the Code, each Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of each
Fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer and each Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A Fund's investments in U.S. Government
Securities are not subject to these limitations.
In order to comply with the Code's diversification requirements under Section
817, each Fund will diversify its investments such that (i) no more than 55% of
the Fund's assets is represented by any one investment; (ii) no more than 70% of
the Fund's assets is represented by any two investments; (iii) no more than 80%
of the Fund's assets is represented by any three investments; and (iv) no more
than 90% of the Fund's assets is represented by any four investments. In the
case of Funds investing in obligations of U.S. government agencies or
instrumentalities, each agency or instrumentality is treated as a separate
issuer for purposes of the above rules.
To comply with a certain state's staff guidelines, each Fund which invests in
foreign countries, as a non-fundamental policy, will follow certain
diversification guidelines with respect to the amount of net assets and the
number of foreign countries in which it may invest. Each such Fund will be
invested in a minimum of five different foreign countries if it has 80% or more
of its net assets invested in foreign countries. Each such Fund may, however,
reduce this minimum to four foreign countries if less than 80% of its net assets
are invested in foreign countries. Each Fund may further reduce the minimum to
three foreign countries if less than 60%; to two foreign countries if less than
40%; and to one foreign country if less than 20% of such Fund's net assets are
invested in issuers located in foreign countries. No Fund will have more than
20% of its net assets invested in issuers located in any one foreign country
except that a Fund may have up to an additional 15% of its net assets in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany. These diversification
guidelines do not apply to a Fund's investment in issuers located in the U.S.
ILLIQUID SECURITIES. Generally an "illiquid security" is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument. Subject to
this limitation, the Board of Trustees has authorized each Fund to invest in
restricted securities where such investment is consistent with the Fund's
investment objective and has authorized such securities to be considered to be
liquid to the extent the Fund's Investment Manager determines that there is a
liquid institutional or other market for such securities for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board of Trustees will
review any determination by the Fund's Investment Managers to treat a restricted
security as liquid on a regular basis, including the Investment Managers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the Funds' advisers and the Board of Trustees will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (iii) dealer undertakings to make
a market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent a
Fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the applicable Fund may be increased if qualified
institutional buyers become uninterested in purchasing these securities or the
market for these securities contracts.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in
which the Funds(except Money Market) may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments and the issuance by that entity of one or more
classes of securities("Structured Investments")backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Investments to
create securities with different investment characteristics such as varying
maturities, payment priorities or interest rate provisions; the extent of the
payments made with respect to Structured Investments is dependent on the extent
of the cash flow on the underlying instruments. Because Structured Investments
of the type in which such Funds anticipate investing typically involve no credit
enhancement, their credit risk will generally be equivalent to that of the
underlying instruments.
The Funds are permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although a
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of a Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in these
Structured Investments may be limited by the restrictions contained in the 1940
Act. Structured Investments are typically sold in private placement
transactions, and there currently is not an active trading market for Structured
Investments. To the extent such investments are illiquid, they will be subject
to a Fund's restrictions on investments in illiquid securities.
FUTURES CONTRACTS. The Bond, Asset Allocation, International, Developing
Markets, Mutual Discovery, and Mutual Shares Funds may purchase and sell
financial futures contracts. Currently, futures contracts are available on
several types of fixed-income securities including: U.S. treasury bonds,
notes and bills, commercial paper, and certificates of deposit.
As long as required by regulatory authorities, these Funds will limit
their use of futures contracts to hedging transactions in order to avoid being a
commodity pool. For example, they might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Funds' securities or the price of the securities which the Funds
intend to purchase. The Funds' hedging may include sales of futures contracts as
an offset against the effect of expected increases in interest rates and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Funds' exposure to interest rate fluctuations, they may be able to hedge
their exposure more effectively and perhaps at a lower cost by using futures
contracts.
At the time a Fund purchases or sells a futures contract, it is required
to deposit with its custodian (or broker, if legally permitted) a specified
amount of cash or U.S. Government securities("initial margin").The margin
required for a futures contract is set by the exchange or board of trade on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposition the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on initial margin deposits.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Funds pay or receive
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, a Fund will mark
to market its open futures positions. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical off setting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Bond, Asset Allocation, Developing Markets,
Mutual Discovery and Mutual Shares Funds may enter into forward foreign currency
exchange contracts, as well as purchase put or call options on foreign
currencies. In addition, for hedging purposes only, the Bond, Asset Allocation,
International, Developing Markets, Mutual Discovery and Mutual Shares Funds may
enter into foreign currency futures contracts, as described below. The Funds may
also conduct their foreign currency exchange transactions on a spot (I.E., cash)
basis at the spot rate prevailing in the foreign currency exchange market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts")to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging. "Because in connection with a Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, a Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, a Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a Fund than if it
had not engaged in such contracts.
The Bond, Asset Allocation, Developing Markets, Mutual Discovery and
Mutual Shares Funds may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the dollar cost of foreign
securities to be acquired.
As is the case with other kinds of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and a Fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against fluctuation in exchange rates, although, in the event of rate movements
adverse to a Fund's position, the Fund may for forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by a Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
The Bond, Asset Allocation, International, Developing Markets, Mutual
Discovery and Mutual Shares Funds may enter into exchange-traded contracts for
the purchase or sale for future delivery of foreign currencies ("foreign
currency futures"). This investment technique will be used only to hedge against
anticipated future changes in exchange rates which otherwise might adversely
affect the value of a Fund's portfolio securities or adversely affect the prices
of securities that a Fund intends to purchase at a later date. The successful
use of foreign currency futures will usually depend on the ability of a Fund's
Investment Manager to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, a Fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
OPTIONS ON SECURITIES OR INDICES. As indicated in the prospectus, certain
Funds may write covered call and put options and purchase call and put options
on securities or stock indices that are traded on United States and foreign
exchanges and in the over-the-counter markets.
An option on a security is a contract that gives 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 gives the purchaser of the
option, in return for the premium paid, the right to received from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
A Fund may write a call or put option only if the option is "covered". A
call option on a security written by the Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)upon
conversion or exchange of other securities held in its portfolio. A call option
on a security is also "covered" if the Fund holds a call on the same security
and in the same principal amount as the call written where the exercise price of
the call held (1) is equal to or less than the exercise price of the call
written or (2) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or high grade U.S. Government
Securities in a segregated account with its custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains cash or fixed
income securities with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
Developing Markets, Mutual Discovery and Mutual Shares Funds will cover
call options on stock indices that it writes by owning securities whose price
changes, in the opinion of its Investment Manager, are expected to be similar to
those of the index, or in such other manner as may be in accordance with the
rules of the exchange on which the option is traded and applicable laws and
regulations. Nevertheless, where the Fund covers a call option on a stock index
through owner ship of securities, such securities may not match the composition
of the index. In that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. The Fund will cover put options on stock indices that it writes by
segregating assets equal to the option's exercise price, or in such other manner
as may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs)that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
correlation between the changes in value of the underlying security or index and
the changes in value of the Fund's security holdings being hedged.
A Fund may purchase call options on individual securities to hedge against
an increase in the price of securities that the Fund anticipates purchasing in
the future. Similarly, the Fund may purchase call options on a securities index
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of wither buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the Fund may experience losses in some cases as a result of
such inability.
SHORT SALES. Certain Funds may make short sales of securities as indicated in
their respective prospectuses. A short sale is a transaction in which the Fund
sells a security it does not own in anticipation that the market price of that
security will decline. Each Fund expects to make short sales as a form of
hedging to offset potential declines in long positions in similar securities, in
order to maintain portfolio flexibility and for profit.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current value of the
security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
The Mutual Discovery and Mutual Series Funds may make short sales, but will not
make a short sale if, after giving effect to such sale, the market value of all
securities sold short exceeds 5% of the value of the Fund's total assets or the
Fund's aggregate short sales of a particular class of securities exceeds 25% of
the outstanding securities of that class. These Funds may also make short sales
"against the box" without respect to such limitations. In this type of short
sale, at the time of the sale, the Funds own or have the immediate and
unconditional right to acquire at no additional cost the identical security.
STOCK INDEX FUTURES CONTRACTS. The Stock, Asset Allocation, Developing Markets,
International, Mutual Discovery and Mutual Shares Funds may buy and sell index
futures contracts with respect to any stock index, and Templeton Bond Fund may
buy and sell index futures contracts with respect to any bond index trade don a
recognized stock exchange or board of trade. The Funds may invest in index
futures contracts for hedging purposes only, and not for speculation. A Fund may
engage in such transactions only to an extent that the total contract value of
the futures contracts do not exceed 20% of the Fund's total assets at the time
when such contracts are entered into. Successful use of stock index futures is
subject to the ability of the Investment Managers to predict correctly movements
in the direction of the stock markets. No assurance can be given that the
Investment Managers' judgment in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the contract
is made. The value of a unit is the current value of the stock index. For
example, the Standard & Poor's Stock Index("S&P 500 Index" or "Index") is
composed of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. The S&P 500 Index assigns a relative weighing to the value of
one share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one contract would be
worth $75,000 (500 units x $150).The stock index futures contract specifies that
no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the
contract, with the settlement being the difference between the contract price
and the actual level of the stock index at the expiration of the contract. For
example, if a Fund enters into a futures contract to buy 500 units of the S&P
500 Index at a specified future date at a contract price of $150 and the S&P 500
Index is at $154 on that future date, the Fund will gain $2,000 (500 units x
gain of $4).
If a Fund enters into a futures contract to sell 500 units of the stock
index at a specified future date at a contract price of $150 and the S&P 500
Index is at $154 on the future date, the Fund will lose $2,000 (500 units x loss
of $4).
During or in anticipation of a period of market appreciation, a Fund may
enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the securities
which a Fund proposes to purchase change in value in correlation with the stock
index contracted for, the purchase of futures contracts on that index would
result in gains to the Fund which could be offset against rising prices of such
common stock.
During or in anticipation of a period of market decline, A Fund may
"hedge" common stock in its portfolio by selling stock index futures for the
purpose of limiting the exposure of its portfolio to such decline. To the extent
that a Fund's portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index could
substantially reduce the risk to the portfolio of a market decline and, by so
doing, provide an alternative to the liquidation of securities positions in the
portfolio with resultant transaction costs.
REVERSE REPURCHASE AGREEMENTS. Certain Funds may enter into reverse
repurchase agreements with banks and broker-dealers. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive dividend payments on these securities.
When effecting reverse repurchase transactions, each Fund will establish a
segregated account with its custodian bank in which it will maintain cash, U.S.
Government securities or other liquid high grade debt obligations equal in value
to its obligations with respect to reverse repurchase agreements. Reverse
repurchase agreements involve the risk that the market value of the securities
retained by a Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are considered borrowings by the Funds and as such
are subject to the investment limitations discussed under "Fundamental
Investment Restrictions."
These transactions may increase the volatility of a Fund's income or net asset
value. The Fund carries the risk that any securities purchased with the proceeds
of the transaction will depreciate or not generate enough income to cover the
Fund's obligations under the reverse repurchase transaction. These transactions
also increase the interest and operating expenses of a fund.
RISK FACTORS. Each Fund, except the Money Market Fund, has the right to
purchase securities in any foreign country, developed or developing, if they are
listed on an exchange, as well as a limited right to purchase such securities if
they are unlisted. The Growth Fund's investments in foreign securities are not
currently expected to exceed 15% of its assets. Investors should consider
carefully the risks involved in securities of companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange("NYSE"),and securities of some foreign companies are less liquid
and more volatile than securities of comparable United States companies. A Fund,
therefore, may encounter difficulty in obtaining market quotations for purposes
of valuing its portfolio and calculating its net asset value. Although the Funds
may invest up to 15% of their total assets in unlisted securities or securities
with a limited trading market, in the opinion of management such securities do
not present a significant liquidity problem. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the United States, are likely to be higher. In many foreign countries there is
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the United States.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These risks
include(i) less social, political and economic stability;(ii) the small current
size of the markets for such securities and the currently low or nonexistent
volume of trading, which result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property;(vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the Funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Funds could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the Funds' Shareholders.
Certain Eastern European countries, which do not have market economies,
are characterized by an absence of developed legal structures governing private
and foreign investments and private property. Certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment of foreign persons in a particular company, or limit the
investment of foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals.
Authoritarian governments in certain Eastern European countries may
require that a governmental or quasi-governmental authority act as custodian of
a Fund's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of a Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (1) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (2) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (3) persuasiveness of corruption and crime in the Russian
economic system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments;(5) higher rates of inflation including the risk of
social unrest associated with periods of hyper-inflation);(6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on a
Fund's ability to exchange local currencies for U.S. dollars; (7) the risk that
the government of Russia or other executive or legislative bodies may decide not
to continue to support the economic reform program simple minded since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union;(8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale;(9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they
are relatively new and a substantial proportion of securities transactions in
Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) as defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforce ability and it is possible
that subsequential legal amendment or other fraudulent act may deprive a Fund of
its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who an purchase and sell the company's
shares by illegally instructing the registrar to refuse to record transactions
in the share register. This practice may prevent a Fund from investing in the
securities of certain Russian companies deemed suitable by the Investment
Manager. Further, this also could cause a delay in the sale of Russian company
securities by a Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment.
The Funds endeavor to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when a Fund changes investment from one
country to another or when proceeds of the sale of Shares in U.S. dollars are
used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent a Fund from transferring cash out of the
country or withhold portions of interest and dividends at the source, or impose
other taxes with respect to a Fund's investments insecurities of issuers of that
country. There is the possibility of expropriation, nationalization or
confiscatory taxation, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in those
nations.
Each Fund may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations and by indigenous economic and political
developments. Some countries in which a Fund may invest may also have fixed or
managed currencies that are free floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's securities are
denominated may have a detrimental impact on the Fund. Through each Fund's
flexible policy, the Investment managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places a Fund's investments. The exercise of
this flexible policy may include decisions to purchase securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed losses.
The Trustees consider at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions which would affect
the liquidity of the Funds' assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services--Custodian"). However, in the absence of willful misfeasance, bad faith
or gross negligence on the part of the Investment Managers, or reckless
disregard of the obligations and duties under the Investment Management
Agreements, any losses resulting from the holding of a Fund's portfolio
securities in foreign countries and/or with securities depositories will be at
risk of the Shareholders. No assurance can be given that the Trustees' appraisal
of the risks will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are several risks associated with the use of futures contracts and
stock index futures contracts as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount invested. There
can be significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures, including technical influences in futures trading, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when, and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures position, and it would remain obligated to
meet margin requirements until the position is closed. The Funds which are
authorized to engage in futures transactions intend to purchase or sell futures
only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. In addition, many
of the futures contracts available may be relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use of stock
index futures by a Fund for hedging purposes also depends upon the Investment
Manager's ability to predict correctly movements in the direction of the market,
as to which no assurance can be given.
The Funds may enter into a contract for the purchase or sale of a security
denominated in a foreign currency and may enter into a forward foreign currency
contract ("forward contract") in order to "lock in" the U.S. dollar price of the
security. In addition, when an Investment Manager believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the amount
of the former foreign currency, approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The projection
of short-term currency market movements extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the Funds to purchase additional foreign currency on the spot
market (and bear the expense of such purchase)if the market value of the
security is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between a Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
INVESTMENT RESTRICTIONS
The Funds have imposed upon themselves certain investment restrictions
which, together with their investment objectives, are fundamental policies
except as otherwise indicated. No changes in a Fund's investment objectives,
policies or investment restrictions (except those which are not fundamental
policies) can be made without the approval of the Shareholders of that Fund. For
this purpose, the provisions of the 1940 Act require the affirmative vote of the
lesser of either (a) 67% or more of the Fund's Shares present at a Shareholders'
meeting at which the holders more than 50% of the outstanding Shares are present
or represented by proxy or (b) more than 50% of the outstanding Shares of the
Fund.
In accordance with these restrictions, a Fund will not:
1. Invest in real estate or mortgages on real estate, or purchase or sell
commodity contracts, except that Templeton Bond, Asset Allocation, Developing
Markets, Growth, Mutual Discovery and Mutual Shares Funds may invest in
marketable securities secured by real estate or interests therein, such as CMOs,
or issued by companies or investment trusts which invest in real estate or
interests therein and the Bond, Asset Allocation, Developing Markets,
International, Growth, Mutual Discovery and Mutual Shares Funds may purchase and
sell foreign currency futures and financial futures, and the Stock, Asset
Allocation, Developing Markets, International, Growth, Mutual Discovery and
Mutual Shares Funds may purchase and sell stock index futures contracts, and
Templeton Bond Fund may purchase and sell bond index futures contracts.
Purchase or retain securities of any company in which Trustees or officers
of the Trust or of a Fund's Investment Manager, individually owning more than
1/2 of 1% of these securities of such company, in the aggregate own more than 5%
of the securities of such company.
2. With respect to 75% of its total assets, invest more than 5% of the
total value of its assets in the securities of any one issuer, or purchase more
than 10% of any class of securities of anyone company, including more than 10%
of its outstanding voting securities (except for investments in obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities).
3. Act as an underwriter, or issue senior securities except as set
forth in Investment Restriction 6 below.
4. Lend money, except that all Funds may purchase publicly distributed
bonds, debentures, notes and other evidences of indebtedness and may buy from a
bank or broker-dealer U.S. Government obligations with a simultaneous agreement
by the seller to repurchase them at the original purchase price plus accrued
interest, and may lend their portfolio securities.
5. Borrow money for any purpose other than redeeming its Shares or
purchasing its Shares for cancellation, and then only as a temporary measure up
to an amount not exceeding 5% of the value of its total assets, except that
Templeton Bond, Stock, Asset Allocation,and International Funds may borrow money
in amounts up to 30% of the value of its net assets. The Developing Markets,
Growth, Mutual Discovery and Mutual Shares Funds may borrow money from banks in
an amount up to 33 1/3% of the Fund's total assets (including the amount
borrowed), but may not pledge, mortgage or hypothecate its assets for any
purpose, except to secure borrowings and then only to an extent not greater than
15% of the Fund's total assets. Arrangements with respect to margin for futures
contracts, forward contracts and related options are not deemed to be pledge of
assets.
6. Invest more than 25% of its total assets in a single industry, except
that this limitation will not apply to investments in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or
repurchase agreements on such securities, and Templeton Money Market Fund may
invest in obligations issued by domestic banks(including certificates of
deposit, repurchase agreements, and bankers' acceptances) without regard to this
limitation.
Participate on a joint or a joint and several basis in any trading account
in securities.(see "Trading Policies" as to transaction in the same securities
for the Funds and other Templeton funds and clients.
As non-fundamental investment policies, which may be changed by the Board
of Trustees without Shareholder approval, a Fund will not invest more than 15%
of its total assets in securities of foreign issuers which are not listed on a
recognized United States or foreign securities exchange, or more than 15% of its
total assets in (a) securities with a limited trading market,(b) securities
subject to legal or contractual restrictions as to resale, and (c) repurchase
agreements not terminable within seven days. In addition, as non-fundamental
investment policies, Templeton Stock, Asset Allocation, Developing Markets and
International Funds will not invest more than 5% of each Fund's assets in debt
securities rated lower than Baa by Moody's Investors Service, Inc. or BBB by
Standard & Poor's Corporation.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property. The investment restrictions do not preclude a Fund from purchasing the
securities of any issuer pursuant to the exercise of subscription rights
distributed to a Fund by the issuer, unless such purchase would result in a
violation of investment restriction number 7, or the non-fundamental investment
policies discussed above.
TRADING POLICIES
The Investment Managers and their affiliated companies serve as investment
manager to other investment companies and private clients. Accordingly, the
respective portfolios of certain of these funds and clients may contain many or
some of the same securities. When certain funds or clients are engaged
simultaneously in the purchase or sale of the same security, the trades may be
aggregated for execution and then allocated in a manner designed to be equitable
to each party. The larger size of the transaction may affect the price of the
security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be
negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage commissions,
fees (except customary transfer fees) or other remuneration in connection
therewith, may be effected between any of these funds, or between funds and
private clients, under procedures adopted pursuant to Rule 17a-7 under the 1940
Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin Templeton
Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are employees of
Franklin Resources, Inc. or their subsidiaries, are permitted to engage in
personal securities transactions subject to the following general restrictions
and procedures: (1) The trade must receive advance clearance from a Compliance
Officer and must be completed within 24 hours after this clearance; (2) Copies
of all brokerage confirmations must be sent to the Compliance Officer and within
10 days after the end of each calendar quarter, a report of all securities
transactions must be provided to the Compliance Officer;(3) In addition to items
(1) and (2), access persons involved in preparing and making investment
decisions must file annual reports of their securities holdings each January and
also inform the Compliance Officer (or other designated personnel) if they own a
security that is being considered for a fund or other client transaction or if
they are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT OF THE TRUST
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Principal Executive
Officers of the Trust are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
HARRIS J. ASHTON President, Chief Executive Officer and
Metro Center Chairman of the Board, General Host
1 Station Place Corporation (nursery and craft centers);
Stamford, Connecticut Director, RBC Holdings, Inc. (a bank
Trustee holding company) and Bar-S Foods (a meat
packing company); and director, trustee
or managing general partner, as the case
may be, of 56 of the investment
companies in the Franklin Templeton
Group of Funds. Age 64
NICHOLAS F. BRADY* Chairman of Templeton Emerging markets
102 East Dover Street Investment Trust PLC; Chairman of
Easton, Maryland Templeton Latin America Investment Trust
Trustee PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm)
(1994-present); chairman and director of
Templeton Central and Eastern European
Fund; director of the Amerada Hess
Corporation, Christiana Companies, and
the H.J. Heinz Company; formerly,
Secretary of the United States
Department of the Treasury (1988-1993);
and chairman of the board of Dillion,
Read & Co. Inc. (investment banking)
prior thereto; and director or trustee
of 23 of the investment companies in the
Franklin Templeton Group of Funds. Age
65.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; Director of
Florham Park, New Jersey General Host Corporation; director,
Trustee trustee or managing general partner, as
the case may be, of 58 of the investment
companies in the Franklin Templeton
Group of Funds. Age 63.
ANDREW H. HINES, JR. Consultant for the Triangle Consulting
150 2nd Avenue N. Group; chairman and director of Precise
St. Petersburg, Florida Power Corporation;
Trustee executive-in-residence of Eckerd College
(1991-present); director of Checkers
Drive-In Restaurants Inc.; formerly,
chairman of the board and chief
executive officer of Florida Progress
Corporation (1982-1990) and director of
various of its subsidiaries; and
director or trustee of 24 of the
investment companies in the Franklin
Templeton Group of Funds. Age 72.
EDITH E. HOLIDAY Director (1993-present) of Amerada Hess
3239 38th Street, N.W. Corporation and Hercules Incorporated;
Washington, D.C. 20016 director of Beverly Enterprises, Inc.
Trustee (1995-present) and H.J. Heinz Company
(1994-present); chairman (1995-present)
and trustee (1993-present) of National
Child Research Center; formerly,
assistant to the President of the United
States and Secretary of the Cabinet
(1990-1993), general counsel to the
United States Treasury Department
(1989-1990), and counselor to the
Secretary and Assistant Secretary for
Public Affairs and Public Liaison--
United States Treasury Department
(1988-1989); and director or trustee of
15 of the investment companies in the
Franklin Templeton Group of Funds.
Age 44.
CHARLES B. JOHNSON* President, chief executive officer, and
777 Mariners Island Blvd. director of Franklin Resources, Inc.;
San Mateo, California chairman of the board and director of
Chairman of the Board Franklin Advisers, Inc. and Franklin
and Vice President Templeton Distributors, Inc.; director
of General Host Corporation (nursery and
craft centers) and Franklin Templeton
Services, Inc.; and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin
Resources, Inc. and 57 of the investment
companies in the Franklin Templeton
Group of Funds. Age 63.
BETTY P. KRAHMER Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic
Wilmington, Delaware analyst, U.S. government; and director
Trustee or trustee of 23 of the investment
companies in the Franklin Templeton
Group of Funds. Age 67.
GORDON S. MACKLIN Chairman, White River Corporation
8212 Burning Tree Road (information and financial services);
Bethseda, Maryland 20817 Director, Fund American Enterprises
Trustee Holdings, Inc.(financial services), MCI
Communications Corporation, CCC
Information Services Group, Inc.
(information services), MedImmune, Inc.
(biotechnology), Source One Mortgage
Services Corporation (financial
services), Shoppers Express (home
shopping), Spacehab, Inc. (aerospace
services); and director, trustee or
managing general partner, as the case
may be, of 53 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group (venture
capital and investment banking);
Director, H & Q Healthcare Investors
(investment trust); and President,
National Association of Securities
Dealers, Inc. Age 67.
FRED R. MILLSAPS Manager of personal investments
2665 NE 37th Drive (1978-present); director of various
Fort Lauderdale, Florida other business and nonprofit
Trustee organizations; formerly, chairman and
chief executive officer of Landmark
Banking Corporation (1969-1978);
financial vice president of Florida
Power and Light (1965-1969); and vice
president of The Federal Reserve Bank of
Atlanta (1958-1965); and director or
trustee of 24 of the investment
companies in the Franklin Templeton
Group of Funds Age 67.
CHARLES E. JOHNSON Senior Vice President and Director,
777 Mariners Island Blvd. Franklin Resources, Inc.; Senior Vice
San Mateo, California President, Franklin Templeton
President Distributors, Inc.; President and
Director, Templeton Worldwide, Inc. and
Franklin Institutional Services
Corporation; officer and/or director, as
the case may be, of some of the
subsidiaries of Franklin Resources, Inc.
and officer and/or director or trustee,
as the case may be, of 39 the investment
companies in the Franklin Templeton
Group of Funds. Age 39.
MARK G. HOLOWESKO President and director of Templeton
Lyford Cay Global Advisors Limited; chief
Nassau, Bahamas investment officer of the global equity
Vice President research for Templeton Worldwide, Inc.;
president or vice president of the
Templeton Funds; formerly, investment
administrator with Roy West Trust
Corporation (Bahamas) Limited
(1984-1985); and director or trustee of
22 of the investment companies in the
Franklin Templeton Group of Funds. Age
36.
MARTIN L. FLANAGAN Senior Vice President, Chief Financial
777 Mariners island Blvd. Officer and Treasurer, Franklin
San Mateo, California Resources, Inc.; President, Franklin
Vice President Templeton Services, Inc.; Executive Vice
President, Templeton Worldwide, Inc.;
Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton
Investor Services, Inc.; Treasurer,
Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services,
Inc.; officer of most other subsidiaries
of Franklin Resources, Inc.; and
officer, director and/or trustee of 61
of the investment companies in the
Franklin Templeton Group of Funds. Age
36.
SAMUEL J. FOESTER, JR. President of the Templeton Global Bond
500 East Broward Blvd. Managers Division of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.; president or
Vice President vice president of other Templeton Funds;
founder and partner of Forester,
Hairston Investment Management
(1989-1990); managing director (Mid-East
Region) of Merrill Lynch, Pierce, Fenner
& Smith Inc. (1987-1988); and an advisor
for Saudi Arabian monetary Agency
(1982-1987). Age 47.
JOHN R. KAY Vice president and treasurer of
500 East Broward Blvd. Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; assistant
Vice President vice president of Franklin Templeton
Distributors, Inc.; formerly, vice
president and controller of the Keystone
Group, Inc.; and director or trustee of
22 of the investment companies in the
Franklin Templeton Group of Funds. Age
56.
THOMAS J. LATTA Vice president of the Templeton Global
500 East Broward Blvd. Bond Managers division of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.; vice president
Vice President of various Templeton Funds;
formerly, portfolio manager, Forester &
Hairston (1988-1991); investment
adviser, Merrill Lynch, Pierce, Fenner &
Smith Incorporated (1981-1988). Age 35.
RUPERT H. JOHNSON, JR. Executive Vice President and Director,
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin
San Mateo, California Templeton Distributors, Inc.; President
Vice President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director,
Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director, trustee or managing
general partner, as the case may be, of
most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of
the investment companies in the Franklin
Templeton Group of Funds. Age 55.
HARMON E. BURNS Executive Vice President, Secretary and
777 Mariners Island Blvd. Director, Franklin Resources, Inc.;
San Mateo, California Executive Vice President and Director,
Vice President Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc. and Franklin Templeton
Services, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the
case may be, of the other subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Age 51.
DEBORAH R. GATZEK Senior Vice President and General
777 Mariners Island Blvd. Counsel, Franklin Resources, Inc.;
San Mateo, California Senior Vice President,Franklin Templeton
Vice President Services, Inc.and Franklin Templeton
Distributors, Inc.; Vice President,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc., and
officer of 61 of the investment
companies in the Franklin Templeton
Group of Funds. Age 47.
JAMES R. BAIO Certified public accountant; senior vice
500 East Broward Blvd. president of Templeton Worldwide, Inc.,
Fort Lauderdale, Florida Templeton Global Investors, Inc., and
Treasurer Templeton Funds Trust Company; formerly,
senior tax manager, Ernst & Young
(certified public accountants)
(1977-1989). and director or trustee of
22 of the investment companies in the
Franklin Templeton Group of Funds. Age
42.
- ---------------------------------------
*THESE ARE TRUSTEES WHO ARE "INTERESTED PERSONS" OF THE TRUST AS THAT TERM IS
DEFINED IN THE 1940 ACT. MR. BRADY AND FRANKLIN RESOURCES, INC. ARE LIMITED
PARTNERS OF DARBY OVERSEAS PARTNERS, L.P. ("DARBY OVERSEAS"). MR. BRADY
ESTABLISHED DARBY OVERSEAS IN FEBRUARY , 1994, AND IS CHAIRMAN AND A
SHAREHOLDER OF THE CORPORATE GENERAL PARTNER OF DARBY OVERSEAS. IN ADDITION,
DARBY OVERSEAS AND TEMPLETON GLOBAL ADVISORS LIMITED ARE LIMITED PARTNERS OF
DARBY EMERGING MARKETS FUND, L.P.
There are no family relationships between any of the Trustees.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or trustee who is an officer, trustee or employee of
the Investment Managers or their affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $6000.00 and a fee of
$500.00 per meeting attended of the Board and its Committees. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the Trustees by
the Trust and by all investment companies in the Franklin Templeton Group:
NUMBER OF
AGGREGATE FRANKLIN TOTAL COMPENSATION
COMPENSATION TEMPLETON FUND FROM ALL FUNDS IN
FROM THE BOARDS ON WHICH FRANKLIN
NAME OF TRUSTEE TRUST* TRUSTEE SERVES TEMPLETON GROUP*
Harris J. Ashton $7,350 56 $343,591
Nicholas F. Brady 7,350 23 119,275
F. Bruce Clarke** 7,697 19 69,500
Hasso-G von 7,697 20 66,375
Diergardt-Naglo**
S. Joseph Fortunato 7,350 58 360,411
Andrew H. Hines, 8,027 22 130,525
Jr.
Betty P. Krahmer 7,350 22 119,275
Gordon S. Macklin 7,680 53 335,541
Fred R. Millsaps 7,697 24 125,275
*For the fiscal year ended December 31, 1996.
** Messrs. Clarke and Von Diergardt-Naglo resigned as Trustees during 1996.
PRINCIPAL SHAREHOLDERS
Shares of the Fund are sold to and owned only by insurance company
separate accounts to serve as the investment vehicle for variable annuity and
life insurance contracts. As of January 31, 1997, there were 11,831,502.990
Shares of Templeton Money Market Fund outstanding, of which no Shares were owned
by the Trustees and officers of the Trust; 2,928,805.466 Shares of Templeton
Bond Fund outstanding, of which no Shares were owned by the Trustees and
officers of the Trust; 28,483,531.104 Shares of Templeton Stock Fund
outstanding, of which no Shares were owned by the Trustees and officers of the
Trust; 26,670,098.818 Shares of Templeton Asset Allocation Fund outstanding, of
which no Shares were owned by the Trustees and officers of the Trust;
38,079,104.090 Shares of Templeton International Fund outstanding, of which no
Shares were owned by the Trustees and officers of the Trust; and 9,717,629.413
Shares of Templeton Developing Markets Fund outstanding, of which no Shares were
owned by the Trustees and officers of the Trust. As of January 31,1997, Phoenix
Home Mutual Life Insurance Company ("Phoenix Home Life") owned 100% of the
outstanding Shares of Templeton Money Market Fund, 58% of the outstanding Shares
of Templeton Bond Fund, 50% of the outstanding Shares of Templeton Stock Fund,
26.8% of the outstanding Shares of Templeton Asset Allocation Fund, and 16% of
the outstanding Shares of Templeton International Fund As of January 31, 1997,
The Travelers Insurance Company ("The Travelers") owned 42% of the outstanding
Shares of Templeton Bond Fund, 49.5% of the outstanding Shares of Templeton
Stock Fund, and 37.5% of the outstanding Shares of Templeton Asset Allocation
Fund. As of January 31, 1997, the Variable Annuity Life Insurance Company
("VALIC") owned 35.5% of the outstanding shares of Templeton Asset Allocation
Fund and 78% of Templeton International Fund. As of January 31, 1997,
IDS/American Express ("IDS/AMEX"), a Minnesota Corporation, on behalf of the
Flexible Portfolio Annuity, owned 94% of the outstanding shares of the Templeton
Developing Markets Fund. However, Phoenix Home Life, The Travelers, VALIC and
IDS/AMEX will exercise voting rights attributable to these Shares in accordance
with voting instructions received by owners of the contracts issued by Phoenix
Home Life, The Travelers, VALIC and IDS/AMEX. To this extent, Phoenix Home Life,
The Travelers VALIC, and IDS/AMEX do not exercise control over the Trust by
virtue of the voting rights from their ownership of Trust Shares. To the
knowledge of management, as of January 31, 1997, no other person owned of record
or beneficially 5% or more of the Shares of any of the Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of Templeton
Money Market Fund and Templeton Bond Fund is the Templeton Global Bond Managers
division ("TGBM") of Templeton Investment Counsel, Inc.("TICI"), a Florida
corporation with offices in Fort Lauderdale, Florida. The Investment Manager of
Templeton Asset Allocation Fund, Templeton Stock Fund, and Templeton
International Fund is TICI. The Investment Manager of Templeton Developing
Markets Fund is Templeton Asset Management Ltd. ("Templeton Singapore"). The
Investment Manager of Franklin Growth Investments Fund is Franklin Advisers,
Inc. ("Advisers"). The Investment Manager of Mutual Discovery Investments Fund
and Mutual Shares Investments Fund is Franklin Mutual Advisers, Inc. ("Mutual
Advisers"). The Investment Management Agreements between TICI and TGBM and the
Trust on behalf of such Funds (the "Management Agreements"), dated October 30,
1992, and amended and restated on February 25, 1994, were approved by the
Shareholders of the Funds on October 30, 1992, and were last approved by the
Board of Trustees, including a majority of the Trustees who were not parties to
the Agreements or interested persons of any such party, at a meeting held on
February 23, 1996, and will continue through April 30, 1997. The Investment
Management Agreement between Templeton Singapore and the Trust on behalf of
Templeton Developing Markets Fund, dated February 23, 1996, was approved by the
sole shareholder of the Fund on March 1, 1996 and by the Board of Trustees,
including a majority of the Trustees who were not parties to the Agreement or
interested persons of any such party, at a meeting held on February 23, 1996 and
will continue in effect through April 30, 1997. The Investment Management
Agreement between Advisers and the Trust on behalf of Franklin Growth
Investments Fund, dated (), 1997, was approved by the sole shareholder of the
Fund on (), 1997 and by the Board of Trustees, including a majority of the
Trustees who were not parties to the Agreement or interested persons of any such
party, at a meeting held on February (), 1997 and will continue in effect
through (), 1998. The Investment Management Agreement between Mutual Advisers
and the Trust on behalf of Mutual Discovery Investments Fund and Mutual Shares
Investments Fund, dated (), 1997, was approved by the sole shareholder of the
Fund on (), 1997 and by the Board of Trustees, including a majority of the
Trustees who were not parties to the Agreement or interested persons of any such
party, at a meeting held on February (), 1997 and will continue in effect
through (), 1998.
The Management Agreements will continue from year to year thereafter subject to
approval annually by the Board of Trustees or by vote of a majority of the
outstanding Shares of each Fund (as defined in the 1940 Act) and also, in either
event, the approval of a majority of those Trustees who are not parties to the
Management Agreements or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
The Investment Management Agreements require the Investment Managers to
manage the investment and reinvestment of each Fund's assets. The Investment
Managers are not required to furnish any personnel, overhead items or facilities
for the Funds, including daily pricing or trading desk facilities, although such
expenses are paid by investment advisers of some other investment companies.
The Management Agreements provide that the Investment Managers will select
brokers and dealers for execution of each Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Brokerage Allocation").
Although the services provided by broker-dealers in accordance with the
brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Managers and other investment management clients of the
Investment Managers and of their affiliates, as well as the Funds, the value of
such services is indeterminable and the Investment Managers' fee is not reduced
by any offset arrangement by reason thereof.
Under the Management Agreements, the Investment Managers are permitted to
provide investment advisory services to other clients, including clients which
may invest in the same types of securities as the Funds and, in providing such
services, the Investment Managers may use information furnished by others.
Conversely, information furnished by others to the Investment Managers in
providing services to other clients may be useful to the Investment Managers in
providing services to the Funds. When an Investment Manager determines to buy or
sell the same security for a Fund that the Investment Manager or certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by the Investment
Manager, with approval by the Board of Trustees, to be impartial and fair, in
order to seek good results for all parties. Records of securities transactions
of persons who know when orders are placed by a Fund are available for
inspection at least four times annually by the compliance officer of the Trust
so that the non-interested Trustees(as defined in the 1940 Act)can be satisfied
that the procedures are generally fair and equitable to all parties.
The Investment Managers also provide management services to numerous other
investment companies or funds and accounts pursuant to management agreements
with each fund or account. The Investment Managers may give advice and take
action with respect to any of the other funds and accounts they manage, or for
their own accounts, which may differ from the action taken by an Investment
Manager on behalf of a Fund. Similarly, with respect to a Fund, an Investment
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund or accounts.
Furthermore, the Investment Managers are not obligated to refrain from investing
in securities held by a Fund or other funds which they manage or administer. Any
transactions for the accounts of the investment Managers and other access
persons will be made in compliance with the Trust's Code of Ethics as described
in the section "Trading Policies-Personal Securities Transactions."
The Management Agreements provide that the Investment Managers shall have
no liability to the Trust, a Fund or any Shareholder of a Fund for any error of
judgment, mistake of law, or any loss arising out of any investment or other act
or omission in the performance by the Investment Manager of its duties under the
Management Agreement, or for any loss or damage resulting from the imposition by
any government of exchange control restrictions which might affect the liquidity
of a Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments to
which such assets might be exposed, except any liability resulting from willful
misfeasance, bad faith or gross negligence on the Investment Manager's part, or
reckless disregard of its duties under the Management Agreement. The Management
Agreements will terminate automatically in the event of their assignment, and
may be terminated by the Trust on behalf of a Fund at any time without payment
of any penalty on 60 days' written notice, with the approval of a majority of
the Trustees in office at the time or by vote of a majority of the outstanding
voting securities of that Fund (as defined by the 1940 Act).
MANAGEMENT FEES. For its services, Templeton Money Market Fund pays its
Investment Manager a monthly fee equal on an annual basis to 0.35% of its
average daily net assets up to $200 million, reduced to 0.30% of such net assets
from $200 million up to $1.3 billion and further reduced to 0.25% of such net
assets in excess of $1.3 billion. Templeton Bond Fund pays its Investment
Manager a monthly fee equal on an annual basis to 0.50% of its average daily net
assets up to $200 million, reduced to 0.45% of such net assets from $200 million
up to $1.3 billion and further reduced to 0.40% of such net assets in excess of
$1.3 billion.
Templeton Asset Allocation Fund pays its Investment Manager a monthly fee equal
on an annual basis to 0.65% of its average daily net assets up to $200 million,
reduced to 0.585% of such net assets from $200 million up to $1.3 billion and
further reduced to 0.52% of such net assets in excess of $1.3 billion.
Templeton Stock and International Funds pay their Investment Manager a monthly
fee equal on an annual basis to 0.75% of its average daily net assets up to $200
million, reduced to 0.675% of such net assets from $200 million up to $1.3
billion and further reduced to 0.60% of such net assets in excess of $1.3
billion.
Templeton Developing Markets Fund pays its Investment Manager a monthly fee
equal on an annual basis to 1.25% of its average daily net assets. During the
fiscal years ended December 31, 1996, 1995 and 1994, the Funds paid the
following investment management fees:
1996 1995 1994
---- ---- ----
Templeton Money Market Fund $ 74,375 $ 88,106
Templeton Bond Fund $ 156,062 $ 149,843
Templeton Stock Fund $2,102,259 $1,686,602
Templeton Asset Allocation Fund $1,662,023 $1,186,540
Templeton International Fund $1,222,834 $ 404,532
Templeton Developing Markets Fund
(1996 figures to be supplied)
The Franklin Growth Investments Fund is obligated to pay Advisers a monthly fee,
based upon the Fund's average daily net assets, computed at the annual rate of
0.60 of 1% of average daily net assets on the first $200 million of average
daily net assets; 0.50% of 1% up to $1.2 billion of average daily net assets;
and 0.40 of 1% on average daily net assets in excess of $1.2 billion.
The Mutual Discovery Fund and Mutual Shares Fund are obligated to pay Franklin
Mutual a monthly fee, based upon each Fund's average daily net assets, computed
at the annual rate of .80 and .60, of 1%, respectively of average daily net
assets.
The Investment Managers may determine in advance to limit the management
fees or to assume responsibility for the payment of certain operating expenses
relating to the operation of any Fund, which may have the effect of decreasing
the total expenses and increasing the total return of such Fund. Any such action
is voluntary and may be terminated by the Investment Managers at any time unless
otherwise indicated. Templeton Singapore, the Investment Manager of Templeton
Developing Markets Fund, 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 such 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 such Fund's total expenses to 1.70% of average daily
net assets, the Fund's Fund Administrator 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 INVESTMENT MANAGERS. The Investment Managers are indirect wholly
owned subsidiaries of Franklin, a publicly traded company whose shares are
listed on the NYSE. Charles B. Johnson (a Trustee and Vice President of the
Trust) and Rupert H. Johnson, Jr. are principal shareholders of Franklin and
own, respectively, approximately 20% and 16% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
FUND ADMINISTRATOR. Templeton Funds Annuity Company performs certain
administrative functions as Fund Administrator for the Trust, including:
o providing office space, telephone, office equipment and supplies for
the Trust;
o paying compensation of the Trust's officers for services rendered as
such;
o authorizing expenditures and approving bills for payment on behalf of
the Trust;
o supervising preparation of annual and semi-annual reports, notices of
dividends, capital gains distributions and tax credits;
o daily pricing of the Funds' investment portfolios and supervising
publication of daily quotations of the bid and asked prices of the
Funds' Shares, earnings reports and other financial data;
o providing trading desk facilities for the funds;
o monitoring relationships with organizations serving the Trust,
including the Custodian and printers;
o supervising compliance by the Trust with recordkeeping requirements
under the 1940 Act and regulations thereunder, with state regulatory
requirements, maintaining books and records for the Trust (other than
those maintained by the Custodian and Transfer Agent), and filing of
tax reports on behalf of the Trust other than the Trust's income tax
returns; and
o providing executive, clerical and secretarial help needed to carry out
these responsibilities.
For its services, the Fund Administrator receives a monthly fee equal on
an annual basis to 0.15% of the combined average daily net assets of the Funds,
reduced to 0.135% of the Funds' aggregate net assets in excess of $200 million,
further reduced to 0.10% annually of such net assets in excess of $700 million
and further reduced to 0.075% annually of such net assets in excess of $1.2
billion. The fee is allocated among the Funds according to their respective
average daily net assets. Since the Fund Administrator's fee covers services
often provided by investment advisers to other funds, the Funds' combined
expenses for management and administrative services together may be higher than
those of some other investment companies. During the fiscal years ended December
31, 1996, 1995, and 1994, the Fund Administrator received fees of $(),
$1,380,760, $1,006,867 respectively.
The Fund Administrator is relieved of liability to the Trust for any act
or omission in the course of its performance under the Fund Administrator
Agreement, in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations and duties under the Agreement. The
Business Management Agreement may be terminated by a Fund at any time on 60
days' written notice without payment of penalty, provided that such
determination shall be directed or approved by vote of a majority of the
Trustees of the Trust in office at the time or by vote of a majority of the
outstanding voting securities of that Fund, and shall terminate automatically
and immediately in the event of its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned subsidiary of
Franklin.
CUSTODIAN. The Chase Manhattan Bank, N.A. serves as Custodian of the
Trust's assets, which are maintained at the Custodian's principal office,
MetroTech Center, Brooklyn, New York, New York 11245 and at the offices of its
branches and agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Trustees pursuant to Rule
17f-5 under the 1940 Act. The Bank of New York, Mutual Funds Division, 90
Washington Street, New York, New York 10286, acts as custodian of the securities
and other assets of the Franklin Growth Investments Fund. The State Street Bank
and Trust Company, Atlantic Division, 225 Franklin Street, Boston, MA 02110 acts
as custodian for the Mutual Discovery and Mutual Shares Investments Funds. The
Custodians, their branches and sub-custodians, generally domestically and
frequently abroad, do not actually hold certificates for the securities in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed on from time to time. The Custodians do
not participate in decisions relating to the purchase and sale of portfolio
securities.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Trust.
INDEPENDENT ACCOUNTANTS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New
York, New York 10017, serves as independent accountants for the Trust. Its audit
services comprise examination of the Trust's financial statements, review of the
Trust's filings with the Securities and Exchange Commission ("SEC")and
preparation of the Trust's federal and state corporation tax returns.
REPORTS TO SHAREHOLDERS. The Trust's fiscal year ends on December 31.
Shareholders are provided at least semiannually with reports showing the Funds'
portfolios and other information, including an annual report with financial
statements audited by independent accountants. Shareholders who would like to
receive an interim quarterly report may phone the Fund Information Department at
1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Management Agreements provide that the Investment Managers are
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of a Fund's portfolio transactions, and, when applicable, the
negotiation of commissions in connection therewith. All recommendations,
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with brokers who are
selected by an Investment Manager as able to achieve "best execution" of such
orders. "Best execution" means prompt and reliable execution at the most
favorable securities price, taking into account the other provisions hereinafter
set forth. The determination of what may constitute best execution and price in
the execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to a Fund (involving both price paid or received and any commissions and
other costs paid), the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by an Investment
Manager in determining the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the Investment
Managers take into account its past experience as to brokers qualified to
achieve "best execution, "including brokers who specialize in any foreign
securities held by a Fund.
3. The Investment Managers are authorized to allocate brokerage business
to brokers who have provided brokerage and research services, as such services
are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934
Act"), for a Fund and/or other accounts, if any, for which an Investment Manager
exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions as to which fixed minimum commission rates are not
applicable, to cause a Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have charged for
effecting that transaction, if an Investment Manager in making the selection in
question determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In reaching
such determination, an Investment Manager is not required to place or to attempt
to place a specific dollar value on the research or execution services of a
broker or on the portion of any commission reflecting either of said services.
In demonstrating that such determinations were made in good faith, the
Investment Manager shall be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Trust's brokerage policy; that the
research services provide lawful and appropriate assistance to an Investment
Manager in the performance of its investment decision-making responsibilities;
and that the commissions paid were within a reasonable range. The determination
that commissions were within a reasonable range shall be based on any available
information as to the level of commissions known to be charged by other brokers
on comparable transactions, but there shall be taken into account the Trust's
policies that (i) obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that usually it is more
beneficial to a Fund to obtain a favorable price than to pay the lowest
commission and(ii) the quality, comprehensiveness and frequency of research
studies which are provided for an Investment Manager are useful to the
Investment Manager in performing its management services under its Management
Agreement with the Trust. Research services provided by brokers to an Investment
Manager are considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under its Management
Agreement with the Trust. Research furnished by brokers through whom a Fund
effects securities transactions may be used by an Investment Manager for any of
its accounts, and not all such research may be used by the Investment Manager
for that Fund. When execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates, account may be taken
of various services provided by the broker, including quotations outside the
United States for daily pricing of foreign securities held in a Fund's
portfolio.
4. Purchases and sales of portfolio securities within the United States
other than on a securities exchange are executed with primary market makers
acting as principal, except where, in the judgment of an Investment Manager,
better prices and execution may be obtained on a commission basis or from other
sources.
5. Sales of shares of investment companies registered under the 1940 Act
which have either the same investment adviser, or an investment adviser
affiliated with an Investment Manager, made by a broker is one factor among
others to be taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the account of a Fund
to that broker; provided that the broker shall furnish "best execution," as
defined in paragraph 1 above, and that such allocation shall be within the scope
of the Fund's other policies as stated above; and provided further, that in
every allocation made to a broker in which such sale of shares is taken into
account there shall be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3 above, on the basis of best
execution alone or best execution plus research services, without taking account
of or placing any value upon such sale of shares.
Insofar as known to management, no Trustee or officer of the Trust, nor
the Investment Manager or Principal Underwriter or any person affiliated with
any of them, has any material direct or indirect interest in any broker employed
by or on behalf of the Trust. Franklin Templeton Distributors, Inc., the Trust's
Principal Underwriter, is a registered broker-dealer, but it has never executed
any purchase or sale transactions for the Funds' portfolios or participated in
any commissions on any such transactions, and has no intention of doing so in
the future. The total brokerage commissions on the Trust's portfolio
transactions (not including any spreads or concessions on principal
transactions) during the fiscal years ended December 31, 1995, 1994, and 1993
were $1,525,000,$672,000 and $340,552, respectively. All portfolio transactions
are allocated to broker-dealers only when their prices and execution, in the
good faith judgment of management, are equal to the best available within the
scope of the Trust's policies. There is no fixed method used in determining
which broker-dealers receive which order or how many orders.
PORTFOLIO TURNOVER. For reporting purposes, each Fund's portfolio turnover
rate is calculated by dividing the value of the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value of
the portfolio securities owned by the Fund during the fiscal year. In
determining such portfolio turnover, short-term U.S. Government securities and
all other securities whose maturities at the time of acquisition were one year
or less are excluded. A 100% portfolio turnover rate would occur, for example,
if all of the securities in the portfolio (other than short-term securities)
were replaced once during the fiscal year. The portfolio turnover rate for each
of the Funds will vary from year to year, depending on market conditions.
It is anticipated that the rate of portfolio turnover as defined above for
Templeton Stock, Asset Allocation, International and Developing Markets Funds
will be less than 50%, and for Templeton Bond Fund, Mutual Discovery Investments
Fund, Mutual Shares Investments Fund and the Franklin Growth Investments Fund
less than 100%, under normal market conditions. Portfolio turnover could be
greater in periods of unusual market movement and volatility. Templeton Bond
Fund's portfolio turnover rates for the fiscal years ended December 31, 1995 and
1994 were 188.11% and 203.91%, respectively. These rates exceed the anticipated
portfolio turnover rate for Templeton Bond Fund as a result of changing interest
rates and currency exposure considerations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which a Fund's Shares may be
purchased and redeemed. See "How to Buy Shares of the Funds" and "How to Sell
Shares of the Funds."
Net asset value per Share is calculated separately for each Fund. Net
asset value per Share is determined as of the scheduled closing time of the NYSE
(generally 4:00 p.m., New York time) every Monday through Friday (exclusive of
national business holidays). The Trust's offices will be closed, and net asset
value will not be calculated, on those days on which the NYSE is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Templeton Money Market Fund uses the amortized cost method to determine
the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which Templeton Money Market Fund would receive if the security were sold.
During these periods the yield to a shareholder may differ somewhat from that
which could be obtained from a similar fund which utilizes a method of valuation
based upon market prices. Thus, during periods of declining interest rates, if
the use of the amortized cost method resulted in a lower value of the Fund's
portfolio on a particular day, a prospective investor in the Fund would be able
to obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values, and existing Shareholders would receive
corresponding less income. The converse would apply during periods of rising
interest rates.
In accordance with Rule 2a-7, the Fund is required to (I) maintain a
dollar-weighted average portfolio maturity of 90 days or less;(ii) purchase only
instruments having remaining maturities of 397 days or less; and (iii)invest
only in U.S. dollar denominated securities determined in accordance with
procedures established by the Board of Trustees to present minimal credit risks
and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board of
Trustees). If a security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board of Trustees,
including approval or ratification of the security by the Board except in the
case of U.S. Government securities. Pursuant to the Rule, the Board is required
to establish procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per Share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the Fund's
portfolio holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations deviates from $1.00 per Share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing Shareholders, the Board will take such corrective action
as it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or establishing a net asset
value per Share by using available market quotations.
The Board of Trustees may establish procedures under which a Fund may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the NYSE is closed other than for customary weekend and
holiday closings,(2)trading on the NYSE is restricted,(3) an emergency exists,
as determined by the SEC, as a result of which disposal of securities owned by
the Fund is not reason ably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (4) for such other
period as the SEC may by order permit for the protection of the holders of a
Fund's Shares.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however each Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with rules of the SEC. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net asset
value. If Shares are redeemed in kind, the redeeming Shareholder might incur
brokerage costs in converting the assets into cash. Each Fund is obligated to
redeem Shares 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.
THE CLASS 2 DISTRIBUTION PLAN
Each Class 2 has adopted a distribution plan or "Rule 12b-1" Plan ("Plan")
pursuant to rule 12b-1 of the 1940 Act. Under the Plans, each Fund offering
Class 2 shares, except the Templeton Bond Fund, may pay up to a maximum of 0.25%
per year of the average daily net assets attributable to their respective Class
2 shares. Under the Templeton Bond Fund's Class 2 Plan, the Templeton Bond Fund
may pay up to a maximum of 0.15% per year of the average daily net assets
attributable to its Class 2 shares. These fees may be used to compensate the
Trust's distributor Franklin/Templeton Distributors, Inc. ("Distributors"), the
Insurance Companies or others for distribution and related services and as a
servicing fee.
The terms and provisions of the Plan, including terms and provisions relating to
required reports, term, and approval, are consistent with Rule 12b-1. In no
event shall the aggregate asset-based sales charges, which include payments made
under each plan exceed the amount permitted to be paid under the rules of the
National Association of Securities Dealers, Inc.
Each plan has been approved in accordance with the provision of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of a
management agreement with an Investment Manager, or by vote of a majority of the
outstanding shares of the class. Distributors, the Insurance Companies or others
may also terminate their respective distribution or service agreement at any
time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
A report will be submitted in writing to the Board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and the Board will be furnished with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
TAX STATUS
Templeton Money Market Fund intends to declare dividends daily and to pay
dividends monthly. Templeton Stock, Bond, Asset Allocation, Developing Markets
and International Funds normally intend to pay an annual dividend representing
substantially all of their net investment income and to distribute annually any
net realized capital gains. By so doing and meeting certain diversification of
assets and other requirements of the Internal Revenue Code of 1986, as
amended(the "Code"),and as described in the Prospectus, each Fund intends to
qualify as a regulated investment company under the Code. The status of the
Funds as regulated investment companies does not involve government supervision
or management of their investment practices or policies. As a regulated
investment company, each Fund will be relieved of liability for United States
federal income tax on that portion of its net investment income and net realized
capital gains which it distributes to its Separate Account Shareholders.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, a Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, each Fund intends to make its distributions
in accordance with the calendar year distribution requirement. A distribution
will be treated as paid on December 31 of the calendar if it is declared by a
Fund during October, November, or December of that year to Shareholders of
record on a date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to Shareholders (a
Separate Account) in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above will not apply in a given calendar year to
a Fund if all of its shareholders at all times during the calendar year are
segregated asset accounts of life insurance companies where the shares are held
in connection with variable contracts.(For this purpose, any shares of a
regulated investment company attributable to an investment not exceeding
$250,000 made in connection with the organization of the company is not taken
into account.) Accordingly, if this condition regarding the ownership of Shares
of each of the Funds is met, the excise tax will be in applicable to that Fund
even if the calendar year distribution requirement is not met.
The Funds may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs").In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. If a Fund receives a so-called "excess is
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which a Fund held the PFIC shares. A Fund itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable ears. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking to market the Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were realized. If this
election were made, tax at the Fund level under the PFIC rules would generally
be eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Income received by a Fund from sources within a foreign country may be
subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debts securities denominated a foreign currency and on
disposition of certain financial contracts and forward contracts, gains or
losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment income to be distributed to its Shareholders as
ordinary income.
Debt securities purchased by a Fund may be treated for federal income tax
purposes as having original issue discount. Original issue discount essentially
represents interest for federal income tax purposes and can be defined generally
as the excess of the stated redemption price at maturity over the issue price.
Original issue discount, whether or not any income is actually received by a
Fund, is treated for U.S. federal income tax purposes as ordinary income earned
by the Fund, and therefore is subject to the distribution requirements of the
Code. Generally, the amount of original issue discount included in the income of
a Fund each year is determined on the basis of a constant yield to maturity
which takes into account the compounding of accrued but unpaid interest.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Certain options, futures contracts and forward contracts in which the
Templeton Stock, Bond, Asset Allocation, Developing Markets and International
Funds may invest are "section 1256 contracts. "Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60-40"),except for certain foreign currency gains and losses
which will be treated as ordinary in character. Also, section 1256 contracts
held by a Fund at the end of each taxable year (and, in some cases, for purposes
of the 4% excise tax, on October 31 of each year) are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized.
The hedging transactions undertaken by certain of the Funds may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund oppositions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Funds which is taxed as ordinary income when distributed to Shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The requirements under the Code relating to the qualification of a Fund as
a regulated investment company may limit the extent to which a Fund may engage
in futures and forward currency contracts.
Distributions of any net investment income and of any net realized short term
capital gains are treated as ordinary income for tax purposes in the hands of
the Separate Account Shareholder. The excess of any net long-term capital gains
over net short-term capital losses will, to the extent distributed and
designated by the distributing Fund as a capital gain dividend, be treated as
long-term capital gains in the hands of the Shareholder regardless of the length
of time a Separate Account may have held the Shares.
Reference is made to the Prospectus for the applicable Contract for
information regarding the federal income tax treatment of distributions to
owners of contracts.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications, and terms and conditions of redemption, except as follows: all
consideration received from the sale of Shares of a Fund, together with all
income, earnings, profits and proceeds thereof, belongs to that Fund and is
charged with liabilities in respect to that Fund and of that Fund's part of
general liabilities of the Trust in the proportion that the total net assets of
the Fund bear to the total net assets of all Funds. In addition, Class 2 Shares
of each Fund offering Class 2 Shares will bear the expense of the Class 2
Distribution plan as it applies to each Fund. The net asset value of a Share of
a class of a Fund is based on the assets belonging to that Fund less the
liabilities charged to that class of the Fund, and dividends are paid on Shares
of a class of a Fund only out of lawfully available assets belonging to that
class of the Fund. In the event of liquidation or dissolution of the Trust, the
Shareholders of each Fund will be entitled, out of assets of the Fund available
for distributions, to the assets belonging to that particular Fund.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which, under the
terms of the Declaration of Trust, are binding only on the property of the
Trust, which, under the terms of the Declaration of Trust, are binding only on
the property of the Trust. The Declaration of the Trust provides for
indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and, thus, should be considered remote.
YIELD AND PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield of
Templeton Money Market Fund or the total return of all Funds in advertisements
or reports to Shareholders or prospective investors. Performance information for
the Funds will not be advertised unless accompanied by comparable performance
information for a separate account to which the Funds offer their Shares.
Current yield for Templeton Money Market Fund will be based on the change
in the value of a hypothetical investment (exclusive of capital changes) over a
particular seven-day period, less a pro-rata share of Templeton Money Market
Fund expenses accrued over that period (the "base period"),and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective Yield" for Templeton Money Market Fund assumes that all
dividends received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return) 365/7 - 1
YIELD = 2[(1 + A-B)6 - 1]
cd
where a = dividend and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per Share on the last day of the
period.
For the seven-day period ending December 31, 1995, the 7-day annualized
yield of Money Market Fund was 5.29% and the effective yield of Money Market
Fund was 5.36%.
Quotations of average annual total return for the Funds will be expressed
in terms of the average annual compounded rate of return for periods in excess
of one year or the total return for periods less than one year of a hypothetical
investment in the Funds over periods of one, five, or ten years (up to the life
of a Fund) calculated pursuant to the following formula: P(1 + T)n = ERV (where
P = a hypothetical initial payment of $1,000,T = the average annual total return
for periods of one year or more or the total return for periods of less than one
year, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of the maximum initial sales charge and
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. The
following table shows the average annual total returns for each Fund for the
periods indicated:
FUND 1 YEAR PERIOD (1) 5 YEAR PERIOD (1) SINCE INCEPTION
- ---- ----------------- ----------------- ---------------
Money Market Fund 5.35% 3.98% 5.03%(2)
Bond Fund 14.92% 8.30% 7.81%(2)
Stock Fund 25.24% 17.48% 12.31%(2)
Asset Allocation Fund 22.48% 15.66% 11.44%(2)
International Fund 15.78% 13.00%(3)
- ------------------------
(1)For period ended December 31, 1996
(2)Since inception on August 31, 1988
(3)Since inception on May 1, 1992
Performance information for a Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities market in general;(ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Quotations of yield or total return for a Fund will not take into account
charges and deductions against any separate account to which the Funds' Shares
are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a separate account will take
such charges into account. Performance information for a Fund reflects only the
performance of a hypothetical investment in a Fund during the particular time
period on which the calculations are based. Performance information should be
considered in light of a Fund's investment objective and policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, each Fund and the Investment Managers may also refer to
the following information:
(1) The Investment Managers' and their affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley Capital International
or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance Corporation, Morgan
Stanley Capital International or a similar financial organization.
(4) The geographic distribution of the Fund's portfolio and the
Fund's top ten holdings.
(5) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
(6) To assist investors in understanding the different returns and risk
characteristics of various investments, the Fund may show historical returns of
various investments and published indices (E.G., Ibbotson Associates, Inc.
Charts and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent long-term
investing.
(10) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services,
Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type of
stocks or other securities.
(12) The number of Shareholders in the Fund or the aggregate number of
shareholders of the Franklin Templeton Funds or the dollar amount of fund and
private account assets under management in advertising materials.
(13) Quotations from the Templeton organization's founder, Sir John Templeton,**
advocating the virtues of diversification and long-term investing, including the
following:
o "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even understand all the
questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative too often."
FINANCIAL STATEMENTS
[The financial statements contained in the Trust's Annual Report to Shareholders
dated December 31, 1996 will be added with a later filing.]
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa by Moody's Investors Service Inc.
("Moody's") are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "giltedge.
"Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with a Aaa group, they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat greater than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations,(I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements maybe lacking or maybe characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, thereby, not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the security over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such securities
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds are
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
ratings classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
AAA: Debt rated "AAA" by Standard & Poor's Corporation("S&P")has the
highest rating assigned by S&P. Capacity to pay interest and repay principal
is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A: Debt rated "A" has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the highest
rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BBB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of this
obligation. "BB" indicates that the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have to capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in payment default. The "D" rating is used when
interest payments are not made on the date due even if the applicable grace
periods has not expired, unless S&P believe that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S INVESTORS SERVICE
aaa: considered to be a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa: considered a high-grade preferred stock. This rating indicates
that there is a reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future.
a: considered to be an upper-medium-grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa: considered to be medium-grade, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba: considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate
and not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b: generally lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
caa: likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payments.
ca: speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payments.
c: lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S CORPORATION
"AAA": This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
"AA": A preferred stock issue rated "AA" also qualifies as a
high-quality fixed-income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
"AAA."
"A": An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
"BBB": An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the "A" category.
"BB", "B", "CCC": Preferred stockrated "BB", "B", and "CCC" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CC": The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently paying.
"C": The preferred stock rated "C" is a non-paying issue.
"D": A preferred stock rated "D" is a non-paying issue with the issuer
in default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus(-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1(or related supporting institutions)have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions)have an acceptable
capacity for repayment off shoot-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories ranging from "A" for the highest quality
obligations to "D" for the lowest. The four categories are as follows:
A: Commercial paper rated "A" is regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety.
A-1: Commercial paper rated "A-1" is regarded as having a very strong
degree of safety regarding timely payment. A "+" designation is applied to those
issues rated "A-1" which possess an overwhelming degree of safety.
A-2: Commercial paper rated "A-2" is regarded as having a strong capacity
for timely payment; however, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Commercial paper rated "A-3" is regarded as having a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations.
B: Commercial paper rated "B" is regarded as having only an adequate
capacity for timely payment and such capacity may be damaged by changing
conditions or short-term adversities.
C: Commercial paper rated "C" is regarded as having a doubtful
capacity for repayment.
D: Commercial paper rated "D" is for a payment default. The "D" rating is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos. 33-20313
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
To be filed by amendment.
(b) Exhibits:
The following exhibits where applicable, are herewith incorporated by reference
to the filings as noted with the exception of Exhibits 5(c); 5(d); 5(e); 5(f);
5(g); 5(h); 8(b); 8(c); 15(a) and 17(a) which are attached.
(1) Declaration of Trust
Filing: Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 25, 1988
(2) copies of the By-Laws or instruments corresponding
thereto;
(3) copies of any voting trust agreement with respect to more
than five percent of any class of equity securities of the
Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent instruments,
defining the rights of the holders of such securities, and
copies of each security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(a) Amended and Restated Investment Management
Agreement for Templeton Money
Market Fund and Templeton Bond Fund
Filing: Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 25, 1988
(b) Form of Investment Management Agreement for
Templeton Developing Markets Fund
Filing: Post-Effective Amendment No. 12 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(c) Form of Investment Management Agreement
between Registrant on behalf of the Templeton Asset
Allocation Fund and Templeton Investment Counsel, Inc.
(d) Form of Investment Management Agreement between
Registrant on behalf of the Templeton Stock Fund
and Templeton Investment Counsel, Inc.
(e) Form of Investment Management Agreement between
Registrant on behalf of the Templeton International
Fund and Templeton Investment Counsel, Inc.
(f) Form of Investment Management Agreement between
Registrant on behalf of the Franklin Growth
Investments Fund and Franklin Advisers, Inc.
(g) Form of Investment Management Agreement between
Registrant on behalf of the Mutual Discovery
Investments Fund and Franklin Mutual Advisers, Inc.
(h) Form of Investment Management Agreement between
Registrant on behalf of the Mutual Shares
Investments Fund and Franklin Mutual Advisers, Inc.
(6) copies of each underwriting or distribution contract
between the Registrant and a principal underwriter, and
specimens or copies of all agreements between principal
underwriters and dealers;
(a) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995
(7) copies of all bonus, profit sharing, pension or other
similar contracts or arrangements wholly or partly for the
benefit of Trustees or officers of the Registrant in their
capacity as such; any such plan that is not set forth in a
formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts
under Section 17(f) of the Investment Company Act of 1940
(the "1940 Act"), with respect to securities and similar
investments of the Registrant, including the schedule of
renumeration;
(a) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No.13 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996
(b) Form of Custody Agreement between Registrant on
behalf of Mutual Discovery Investments Fund and
Mutual Shares Investments Fund, and the State
Street Bank and Trust
(c) Form of Master Custody Agreement between the
Registrant on behalf of Franklin Growth
Investments Fund and the Bank Of New York
(9) Copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;
(a) Form of Amended and Restated Business
Management Agreement
Filing: Post-Effective Amendment No.12 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will
when sold be legally issued, fully paid and nonassessable;
(a) Opinion of Counsel - filed with Rule 24f-2
Notice on February 28, 1996
(11) Copies of any other rulings and consents to the use thereof
relied on in the preparation of this registration statement
and required by Section 7 of the 1933 Act;
To be filed by amendment
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in
consideration for providing the initial capital between or
among the Registrant, the underwriter, adviser, promoter or
initial stockholders and written assurances from promoters or
initial stockholders that their purchases were made for
investment purposes without any present intention of
redeeming or reselling;
(a) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to
Registration Statement of Registrant
on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers
its securities, any instructions thereto and any other
documents making up the model plan. Such form(s) should
disclose the costs and fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to
Rule 12b-1 under the 1940 Act, which describes all material
aspects of the financing of distribution of Registrant's
shares, and any agreements with any person relating to
implementation of such plan.
(a) Form of Distribution Plan between the
Registrant on behalf of Templeton Asset
Allocation Fund, Templeton Bond Fund,
Templeton Developing Markets Fund, Templeton
International Fund, Templeton Stock Fund,
Franklin Growth Investments Fund, Mutual Shares
Investments Fund, Mutual Discovery Investments Fund
and Franklin Templeton Distributors
(16) Schedule for computation of each performance quotation
provided in the registration statement in response to Item 22
(which need not be audited).
(a) Previously filed with Post-Effective
Amendment No. 9 to Registration Statement
filed on April 27, 1995.
(17) Power of Attorney
(a) Power of Attorney from Officers and Directors of the
Registrant excecuted December 12, 1996.
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of January 31, 1997, Phoenix Home Life Mutual Insurance Company, a
Connecticut corporation ("Phoenix Home Life"), on its own behalf and on behalf
of its Phoenix Variable Accumulation Account, owned of record 50% of the
outstanding shares of Templeton Stock Fund, 26.8% of the outstanding shares of
Templeton Asset Allocation Fund, 58% of the outstanding shares of Templeton Bond
Fund, 100% of the outstanding shares of Templeton Money Market Fund and 16% of
the outstanding shares of Templeton International Fund. As of January 31, 1997,
The Travelers Insurance Company ("The Travelers"), on behalf of The Travelers
Fund U for Variable Annuities, owned of record 49.5% of the outstanding shares
of Templeton Stock Fund, 37.5% of the outstanding shares of Templeton Asset
Allocation Fund, and 42% of the outstanding shares of Templeton Bond Fund. As of
January 31, 1997, The Variable Life Insurance company ("VALIC"), a Texas
Corporation, on behalf of The Variable Life Insurance Company Separate Account
A, owned of record 35.5% of the outstanding shares of Templeton Asset Allocation
Fund and 78% of Templeton International Fund. As of January 31, 1997,
IDS/American Express ("IDS/AMEX"), a Minnesota Corporation, on behalf of the
Flexible portfolio Annuity, owned 94% of the outstanding shares of the Templeton
Developing Markets Fund. Phoenix Home Life, The Travelers VALIC and IDS/AMEX,
the "Participating Insurance Companies") will vote shares in accordance with the
voting instructions of holders of variable annuity contracts issued by the
Participating Companies for which the Registrant serves as the investment
vehicle.
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF January 31, 1997
-------------- --------------------
Templeton Stock Fund 3
Templeton Bond Fund 2
Templeton Asset Allocation Fund 4
Templeton Money Market Fund 1
Templeton International Fund 6
Templeton Developing Markets Fund 3
ITEM 27 INDEMNIFICATION
Reference is made to Article IV of the Registrant's Declaration of Trust, which
is incorporated herein by reference. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant pursuant to the
Declaration of Trust or otherwise, the Registrant is aware that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and, therefore, is unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding)is asserted by such trustees, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The officers and directors of the Registrant's investment adviser also
serve as officers and/or directors or trustees for (1) Franklin Resources, Inc.
("Resources"), the corporate parent of all the Registrant's Investment Managers,
and/or (2) other investment companies in the Franklin Group of Funds.
(b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to all Funds in the Trust except the
Templeton Developing Markets, Mutual Discovery Investments, Mutual Shares
Investments, and Franklin Growth Investments Funds and in that capacity
furnishes portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of TICI (SEC
File 801-15125), incorporated herein by reference, which set forth the officers
and directors of TICI and information as to any business, profession, vocation
of employment of a substantial nature engaged in by those officers and directors
during the past two years.
(c) Templeton Asset Management Ltd., formerly known as Templeton Investment
Management (Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Fund. For information please see Part B and Schedules A and D of Form
ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
(d) Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("Mutual Advisers"), a direct, wholly owned
subsidiary of Resources, will serve as investment manager to the Mutual
Discovery Investments Fund and the Mutual Series Investments Fund. For
information please see Part B and Schedules A and D of Form ADV of Mutual
Advisers (SEC File 801-53068), incorporated herein by reference, which set forth
the officers and directors of Mutual Advisers and information as to any
business, profession, vocation of employment of a substantial nature engaged in
by those officers and directors during the past two years.
(e) Franklin Advisers, Inc.
Franklin Advisers, Inc. ("Advisers"), a direct wholly owned subsidiary of
Resources, will serve as Investment Manager to the Franklin Growth Investments
Fund. For additional information, please see Part B and Schedules A and D of
Form ADV of Advisers (SEC File 801-26292), incorporated herein by reference,
which sets forth the officers and directors of Advisers and information as to
any business, profession, vocation or employment of a substantial nature engaged
in by those officers and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
Franklin Templeton Distributors, Inc. also acts as principal underwriter of
shares of the following investment companies:
AGE High Income Fund, Inc.
Franklin Balance Sheet Investment Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Asset Allocation Fund
Franklin Real Estate Securities Trust
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Japan Fund
Franklin Templeton Money Fund Trust
Franklin Templeton Fund Allocator Series
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Real Estate Securities Fund
Templeton Smaller Companies Growth, Inc.
(b) The directors and officers of FTD, located at 700 Central Avenue, P.O. Box
33030, St. Petersburg, Florida 33733, are as follows:
NAME POSITION WITH UNDERWRITER POSITION WITH REGISTRANT
Charles B. Johnson Chairman of the Board Chairman, Trustee and
Vice President
Gregory E. Johnson President None
Rupert H. Johnson Executive Vice President Vice President
Harmon E. Burns Executive Vice President and Vice President
Director
Edward V. McVey Senior Vice President None
Kenneth A. Lewis Treasurer None
William J. Lippman Senior Vice President None
Deborah R. Gatzek Senior Vice President and Vice President
Assistant Secretary
Richard C. Stoker Senior Vice President None
Charles E. Johnson Senior Vice President President
Loretta Fry Vice President None
James K. Blinn Vice President None
Richard O. Conboy Vice President None
James A. Escobedo Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Peter Jones Vice President None
Philip J. Kearns Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
Harry G. Mumford Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Leslie M. Kratter Secretary None
John R. Kay Assistant Vice President Vice President
Karen DeBellis Assistant Treasurer Assistant Treasurer
Philip A. Scatena Assistant Treasurer None
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, and other documents required to be maintained by Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and rules
promulgated thereunder are in the possession of Templeton Funds Annuity Company,
700 Central Avenue, St. Petersburg, Florida 33733-3080.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) Not applicable
(b) The Registrant hereby undertakes to file a post-effective amendment using
financial statements which need not be certified, within four to six months
from the effective date of Registrant's Registration Statement for its new
series, Mutual Discovery Investments Fund, Mutual Shares Investments Fund
and Franklin Growth Investments Fund (all of which are effective May 1,
1997) under the Securities Act of 1933.
(c) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the
Fund's annual report and to furnish each person to whom a prospectus is
delivered a copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this post-effective
amendment to the Registrant's Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of San Mateo and the
State of California, on the 14th day of February, 1997.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: CHARLES E. JOHNSON*
Charles E. Johnson, President
*By: /s/ KAREN L. SKIDMORE
Karen L. Skidmore
as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
CHARLES E. JOHNSON* Principal Executive Officer and
Charles E. Johnson Trustee
Dated: February 14,1997
FRED R. MILLSAPS* Trustee
Fred R. Millsaps Dated: February 14, 1997
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: February 14, 1997
BETTY P. KRAHMER* Trustee
Betty P. Krahmer Dated: February 14, 1997
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 14, 1997
HARRIS J. ASTON* Trustee
Harris J. Ashton Dated: February 14, 1997
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 14, 1997
ANDREW H. HINES, JR.* Trustee
Andrew H. Hines, Jr. Dated: February 14, 1997
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 14, 1997
NICHOLAS F. BRADY* Trustee
Nicholas F. Brady Dated: February 14, 1997
JAMES R. BAIO* Trustee
James R. Baio Dated: February 14, 1997
*By /S/ Karen L. Skidmore
Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 17)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1 Declaration of Trust *
EX-99.B2 By-Laws *
EX-99.B5(a) Amended and Restated Investment Management *
Agreement for Templeton Money Market Fund and
Templeton Bond Fund
EX-99.B5(b) Form of Investment Management Agreement for *
Templeton Developing Markets Fund
EX-99.B5(c) Form of Investment Management Agreement between Attached
Registrant on behalf of the Templeton Asset
Allocation Fund and Templeton Investment Counsel,
Inc.
EX-99.B5(d) Form of Investment Management Agreement between Attached
Registrant on behalf of the Templeton Stock Fund
and Templeton Investment Counsel, Inc.
EX-99.B5(e) Form of Investment Management Agreement between Attached
Registrant on behalf of the Templeton
International Fund and Templeton Investment
Counsel, Inc.
EX-99.B5(f) Form of Investment Management Agreement between Attached
Registrant on behalf of the Franklin Growth
Investments Fund and Franklin Advisers, Inc.
EX-99.B5(g) Form of Investment Management Agreement between Attached
Registrant on behalf of the Mutual Discovery
Investments Fund and Franklin Mutual Advisers,
Inc.
EX-99.B5(h) Form of Investment Management Agreement between Attached
Registrant on behalf of the Mutual Shares
Investments Fund and Franklin Mutual Advisers,
Inc.
EX-99.B6(a) Amended and Restated Distribution Agreement *
EX-99.B8(a) Amended and Restated Custodian Agreement *
EX-99.B8(b) Form of Custody Agreement between Registrant on Attached
behalf of Mutual Discovery Investments Fund and
Mutual Shares Investments Fund, and the State
Street Bank and Trust
EX-99.B8(c) Form of Master Custody Agreement between the Attached
Registrant on behalf of Franklin Growth
Investments Fund and the Bank of New York
EX-99.B9(a) Form of Amended and Restated Business Management *
Agreement
EX-99.B10(a) Opinion of Counsel *
EX-99.B13(a) Letter concerning initial capital *
EX-99.B15(a) Form of Distribution Plan between Registrant on Attached
behalf of Templeton Asset Allocation Fund,
Templeton Bond Fund, Templeton Developing Markets
Fund, Templeton Stock Fund, Franklin Growth
Investments Fund, Mutual Shares Investment Fund,
Mutual Discovery Investments Fund and Franklin
Templeton Distributors
EX-99.B16(a) Schedule for Computation of each Performance *
Quotation
EX-99.B17(a) Power of Attorney from Officers and Directors of Attached
the Registrant executed December 12, 1995
*Incorporated by Reference
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series TEMPLETON ASSET ALLOCATION FUND ("Fund")
and TEMPLETON INVESTMENT COUNSEL, INC., a Florida corporation ("Investment
Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these services
to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the
Trust's Agreement and Declaration of Trust and the Fund's investment policies
as adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
its investment securities, and shall take such steps as may be necessary to
implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent
to corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised, subject to guidelines adopted by the Board of
Trustees.
(2) The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.65% of the first $200,000,000 of the
Fund's average daily net assets, reduced for such assets over $200,000,000 to
0.585%, and further reduced for such assets in excess of $1,300,000,000 to
0.52%, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of [Florida for existing funds managed by Templeton
Investment Counsel Inc.; California for new funds managed by Franklin
Advisers Inc. and Franklin Mutual Advisers Inc.], provided that nothing
herein shall be construed as being inconsistent with applicable Federal and
state securities laws and any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
[NAME OF ADVISER]
By:___________________
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series TEMPLETON STOCK FUND ("Fund") and TEMPLETON
INVESTMENT COUNSEL, INC., a Florida corporation ("Investment Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these services
to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the
Trust's Agreement and Declaration of Trust and the Fund's investment policies
as adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
its investment securities, and shall take such steps as may be necessary to
implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent
to corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised, subject to guidelines adopted by the Board of
Trustees.
(2) The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.75% of the first $200,000,000 of the
Fund's average daily net assets, reduced for such assets over $200,000,000 to
0.675%, and further reduced for such assets in excess of $1,300,000,000 to
0.60%, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of [Florida for existing funds managed by Templeton
Investment Counsel Inc.; California for new funds managed by Franklin
Advisers Inc. and Franklin Mutual Advisers Inc.], provided that nothing
herein shall be construed as being inconsistent with applicable Federal and
state securities laws and any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
[NAME OF ADVISER]
By:___________________
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series TEMPLETON INTERNATIONAL FUND ("Fund") and
TEMPLETON INVESTMENT COUNSEL, INC., a Florida corporation ("Investment
Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these services
to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the
Trust's Agreement and Declaration of Trust and the Fund's investment policies
as adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
its investment securities, and shall take such steps as may be necessary to
implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent
to corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised, subject to guidelines adopted by the Board of
Trustees.
(2) The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.75% of the first $200,000,000 of the
Fund's average daily net assets, reduced for such assets over $200,000,000 to
0.675%, and further reduced for such assets in excess of $1,300,000,000 to
0.60%, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of [Florida for existing funds managed by Templeton
Investment Counsel Inc.; California for new funds managed by Franklin
Advisers Inc. and Franklin Mutual Advisers Inc.], provided that nothing
herein shall be construed as being inconsistent with applicable Federal and
state securities laws and any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
[NAME OF ADVISER]
By:___________________
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series FRANKLIN GROWTH INVESTMENTS FUND ("Fund")
and FRANKLIN ADVISORS INC. ("Investment Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these
services to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the
Trust's Agreement and Declaration of Trust and the Fund's investment policies
as adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
its investment securities, and shall take such steps as may be necessary to
implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent
to corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised, subject to guidelines adopted by the Board of
Trustees. The Investment Manager shall render or cause to be rendered regular
reports to the Trust, at regular meetings of its Board of Trustees and at
such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the
Fund's assets and the purchase and sale of its investment securities, (ii)
the reasons for such decisions and (iii) the extent to which those decisions
have been implemented. The Manager shall also make its officers and employees
available to the Board of Trustees and officers of the Trust for consultation
and discussions regarding the management of the Fund and its investment
activities.
(2) It is understood that the Fund is responsible for all of
its own expenses other than those expressly assumed by the Investment Manager
herein. Specifically, the Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.60% of the Fund's average daily net
assets up to $200 million, 0.50% of the Fund's average daily net assets up to
$ 1.3 billion and 0.40% of the Fund's average daily net assets over $ 1.3
billion, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of Florida, provided that nothing herein shall be construed
as being inconsistent with applicable Federal and state securities laws and
any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
FRANKLIN ADVISORS, INC.
By:___________________
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series MUTUAL DISCOVERY INVESTMENTS FUND ("Fund")
and FRANKLIN MUTUAL ADVISORS, INC. ("Investment Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these
services to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the Trust's
Agreement and Declaration of Trust and the Fund's investment policies as adopted
and declared by the Trust's Board of Trustees. In pursuance of the foregoing,
the Investment Manager shall have sole complete discretionaly authority to make
all determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as may
be necessary to implement those determinations. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised, subject to guidelines adopted by the
Board of Trustees. The Investment Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions and (iii) the extent to which those decisions have been
implemented. The Manager shall also make its officers and employees available to
the Board of Trustees and officers of the Trust for consultation and discussions
regarding the management of the Fund and its investment activities.
(2) It is understood that the Fund is responsible for all of
its own expenses other than those expressly assumed by the Investment Manager
herein. Specifically, the Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.80% of the Fund's average daily net
assets, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of Florida, provided that nothing herein shall be construed
as being inconsistent with applicable Federal and state securities laws and
any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
FRANKLIN MUTUAL ADVISORS, INC.
By:___________________
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of [DATE] between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (hereinafter referred to as the
"Trust"), on behalf of its series MUTUAL SHARES INVESTMENTS FUND ("Fund") and
FRANKLIN MUTUAL ADVISORS, INC. ("Investment Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these
services to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the Trust's
Agreement and Declaration of Trust and the Fund's investment policies as adopted
and declared by the Trust's Board of Trustees. In pursuance of the foregoing,
the Investment Manager shall have sole and complete discretionaly authority to
make all determinations with respect to the investment of the Fund's assets and
the purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement those determinations. Such determinations and
services shall include determining the manner in which any voting rights, rights
to consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised, subject to guidelines adopted by the
Board of Trustees. The Investment Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions and (iii) the extent to which those decisions have been
implemented. The Manager shall also make its officers and employees available to
the Board of Trustees and officers of the Trust for consultation and discussions
regarding the management of the Fund and its investment activities.
(2) It is understood that the Fund is responsible for all of
its own expenses other than those expressly assumed by the Investment Manager
herein. Specifically, the Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars at an annual rate of 0.60% of the Fund's average daily net
assets, payable at the end of each calendar month.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on [DATE] and shall
continue in effect until [DATE]. If not sooner terminated, this Agreement
shall continue in effect for successive periods of 12 months each thereafter,
provided that each such continuance shall be specifically approved annually
by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of Florida, provided that nothing herein shall be construed
as being inconsistent with applicable Federal and state securities laws and
any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
FRANKLIN MUTUAL ADVISORS, INC.
By:___________________
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into
as of (), 1997, by and between Templeton Variable Products Series Fund
("Investment Company"), for itself and for each of its Series listed on
Exhibit A, and State Street Bank and Trust Company, a Massachusetts
Trust Company authorized to do a banking business (the "Custodian").
RECITALS
A. The Investment Company is an investment company registered
under the Investment Company Act of 1940, as amended (the "Investment
Company Act") that invests and reinvests, for itself or on behalf of its
Series, in Domestic Securities and Foreign Securities.
B. The Custodian is, and has represented to the Investment
Company that the Custodian is, a "bank" as that term is defined in
Section 2(a)(5) of the Investment Company Act, and is eligible to
receive and maintain custody of investment company assets pursuant to
Section 17(f) and Rule 17f-2 thereunder.
C. The Custodian and the Investment Company, for itself and
for each of its Series, desire to provide for the retention of the
Custodian as a custodian of the assets of the Investment Company and
each Series, on the terms and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form
of a Master Custody Agreement for administrative convenience, this
Agreement shall create a separate custody agreement for each Series
designated on Exhibit A, as though the Investment Company had separately
executed an identical custody agreement for itself and for each of its
Series. No rights, responsibilities or liabilities of any Series shall
be attributed to any other or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have
the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, of the Investment
Company.
"Business Day" with respect to any Domestic Security means any
day, other than a Saturday or Sunday, that is not a day on which banking
institutions are authorized or required by law to be closed in The City
of New York and, with respect to Foreign Securities, a London Business
Day. "London Business Day" shall mean any day on which dealings and
deposits in U.S. dollars are transacted in the London interbank market.
"Custodian" shall mean State Street Bank and Trust Company.
"Domestic Securities" shall have the meaning provided in
Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of the
Board.
"Foreign Custodian" shall have the meaning provided in Section
4.1 hereof.
"Foreign Securities" shall have the meaning provided in Section
2.1 hereof.
"Foreign Securities Depository" shall have the meaning provided
in Section 4.1 hereof.
"Fund" shall mean a Series.
"Investment Company" shall mean Templeton Variable Products
Series Fund
"Investment Company Act" shall mean the Investment Company Act
of 1940, as amended.
"Securities" shall have the meaning provided in Section 2.1
hereof.
"Securities System" shall have the meaning provided in Section
3.1 hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of the Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the
Investment Company.
"Subcustodian" shall have the meaning provided in Subsection
3.7 hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting
transfer agent for the Investment Company.
"Writing" shall mean a communication in writing, a
communication by telex, facsimile transmission, bankwire or other
teleprocess or electronic instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 APPOINTMENT OF CUSTODIAN. The Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of
the Fund, including cash denominated in U.S. dollars or foreign currency
("cash"), securities the Fund desires to be held within the United
States ("Domestic Securities") and securities it desires to be held
outside the United States ("Foreign Securities"). Domestic Securities
and Foreign Securities are sometimes referred to herein, collectively,
as "Securities." The Custodian hereby accepts such appointment and
designation and agrees that it shall maintain custody of the assets of
the Fund delivered to it hereunder in the manner provided for herein.
2.2 DELIVERY OF ASSETS. The Investment Company may deliver to
the Custodian Securities and cash owned by the Funds, payments of
income, principal or capital distributions received by the Funds with
respect to Securities owned by the Funds from time to time, and the
consideration received by the Funds for such Shares or other securities
of the Funds as may be issued and sold from time to time. The Custodian
shall have no responsibility whatsoever for any property or assets of
the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All
Securities accepted by the Custodian on behalf of the Funds under the
terms of this Agreement shall be in "street name" or other good delivery
form as determined by the Custodian.
2.3 SUBCUSTODIANS. Upon receipt of Proper Instructions and a
certified copy of a resolution of the Board or of the Executive
Committee, and certified by the Secretary or an Assistant Secretary, of
an Investment Company, the Custodian may from time to time appoint one
or more other Subcustodians or Foreign Custodians to hold assets of the
affected Funds in accordance with the provisions of this Agreement.
2.4 NO DUTY TO MANAGE. The Custodian, a Subcustodian or a
Foreign Custodian shall not have any duty or responsibility to manage or
recommend investments of the assets of any Fund held by them or to
initiate any purchase, sale or other investment transaction in the
absence of Proper Instructions or except as otherwise specifically
provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS
HELD BY THE CUSTODIAN
3.1 HOLDING SECURITIES. The Custodian shall hold and
physically segregate from any property owned by the Custodian, for the
account of each Fund, all non-cash property delivered by each Fund to
the Custodian hereunder other than Securities which, pursuant to
Subsection 3.8 hereof, are held through a registered clearing agency, a
registered securities depository, the Federal Reserve's book-entry
securities system (referred to herein, individually, as a "Securities
System"), or held by a Subcustodian, Foreign Custodian or in a Foreign
Securities Depository.
3.2 DELIVERY OF SECURITIES. Except as otherwise provided
in Subsection 3.5 hereof, the Custodian, upon receipt of Proper
Instructions, shall release and deliver Securities owned by a Fund and
held by the Custodian in the following cases or as otherwise directed in
Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase
agreement related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in
connection with (i) a tender or other similar offer for Securities owned
by the Fund, or (ii) a tender offer or repurchase by the Fund of its own
Shares;
(e) to the issuer thereof or its agent when such
Securities are called, redeemed, retired or otherwise become payable;
provided, that in any such case, the cash or other consideration is to
be delivered to the Custodian, a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into
the name or nominee name of the Fund, the name or nominee name of the
Custodian, the name or nominee name of any Subcustodian or Foreign
Custodian; or for exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face amount or number
of units; provided that, in any such case, the new Securities are to be
delivered to the Custodian, a Subcustodian or Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, or reorganization of the issuer
of such Securities, or pursuant to a conversion of such Securities;
provided that, in any such case, the new Securities and cash, if any,
are to be delivered to the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities,
the surrender thereof in connection with the exercise of such warrants,
rights or similar Securities or the surrender of interim receipts or
temporary Securities for definitive Securities; provided that, in any
such case, the new Securities and cash, if any, are to be delivered to
the Custodian, a subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of
Securities made by the Fund, but only against receipt by the Custodian,
a Subcustodian or a Foreign Custodian of adequate collateral as
determined by the Fund (and identified in Proper Instructions
communicated to the Custodian), which may be in the form of cash or
obligations issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for which
collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible
for the delivery of Securities owned by the Fund prior to the receipt of
such collateral;
(k) for delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets by the Fund, but
only against receipt by the Custodian, a Subcustodian or a Foreign
Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign
Custodian and a broker-dealer relating to compliance with the rules of
registered clearing corporations and of any registered national
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign
Custodian and a futures commission merchant, relating to compliance with
the rules of the Commodity Futures Trading Commission and/or any
contract market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
(n) upon the receipt of instructions from the Transfer
Agent for delivery to the Transfer Agent or to the holders of Shares in
connection with distributions in kind in satisfaction of requests by
holders of Shares for repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board
or of the Executive Committee certified by the Secretary or an Assistant
Secretary of the Fund, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper purpose, and naming the person or
persons to whom delivery of such securities shall be made.
3.3 REGISTRATION OF SECURITIES. Securities held by the
Custodian, a Subcustodian or a Foreign Custodian (other than bearer
Securities) shall be registered in the name or nominee name of the
appropriate Fund, in the name or nominee name of the Custodian or in the
name or nominee name of any Subcustodian or Foreign Custodian. Each
Fund agrees to hold the Custodian, any such nominee, Subcustodian or
Foreign Custodian harmless from any liability as a holder of record of
such Securities.
3.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts for each Fund, subject only to draft
or order by the Custodian acting pursuant to the terms of this
Agreement, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it hereunder from or for the
account of each Fund, other than cash maintained by a Fund in a bank
account established and used in accordance with Rule 17f-3 under the
Fund Act. Funds held by the Custodian for a Fund may be deposited by it
to its credit as Custodian in the banking departments of the Custodian,
a Subcustodian or a Foreign Custodian. Such funds shall be deposited by
the Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity. In the event a Fund's account for
any reason becomes overdrawn, or in the event an action requested in
Proper Instructions would cause such an account to become overdrawn, the
Custodian shall immediately notify the affected Fund.
3.5 COLLECTION OF INCOME; TRADE SETTLEMENT; CREDITING OF
ACCOUNTS. The Custodian shall collect income payable with respect to
Securities owned by each Fund, settle Securities trades for the account
of each Fund and credit and debit each Fund's account with the Custodian
in connection therewith as stated in this Subsection 3.5. This
Subsection shall not apply to repurchase agreements, which are treated
in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian
shall effect the purchase of a Security by charging the account of the
Fund on the contractual settlement date, and by making payment against
delivery. If the seller or selling broker fails to deliver the Security
within a reasonable period of time, the Custodian shall notify the Fund
and credit the transaction amount to the account of the Fund, but the
Custodian shall have no further liability or responsibility for the
transaction.
(b) Upon receipt of Proper Instructions, the Custodian
shall effect the sale of a Security by withdrawing a certificate or
other indicia of ownership from the account of the Fund and by making
delivery against payment, and shall credit the account of the Fund with
the amount of such proceeds on the contractual settlement date. If the
purchaser or the purchasing broker fails to make payment within a
reasonable period of time, the Custodian shall notify the Fund, debit
the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been
made, redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the
Custodian receives timely and accurate Proper Instructions to enable the
Custodian to effect settlement of any purchase or sale. If the
Custodian does not receive such instructions within the required time
period, the Custodian shall have no liability of any kind to any person,
including the Fund, for failing to effect settlement on the contractual
settlement date. However, the Custodian shall use its best reasonable
efforts to effect settlement as soon as possible after receipt of Proper
Instructions.
(d) The Custodian shall credit the account of the Fund
with interest income payable on interest bearing Securities on payable
date. Dividends and other amounts payable with respect to Domestic
Securities and Foreign Securities shall be credited to the account of
the Fund when received by the Custodian. The Custodian shall not be
required to commence suit or collection proceedings or resort to any
extraordinary means to collect such income and other amounts payable
with respect to Securities owned by the Fund. The collection of income
due the Fund on Domestic Securities loaned pursuant to the provisions of
Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith,
other than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is entitled. The Custodian
shall have no liability to any person, including the Fund, if the
Custodian credits the account of the Fund with such income or other
amounts payable with respect to Securities owned by the Fund (other than
Securities loaned by the Fund pursuant to Subsection 3.2(j) hereof) and
the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as
determined by the Custodian in its sole discretion. In such event, the
Custodian shall be entitled to reimbursement of the amount so credited
to the account of the Fund.
3.6 PAYMENT OF FUND MONIES. Upon receipt of Proper
Instructions the Custodian shall pay out monies of a Fund in the
following cases or as otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only,
except as otherwise provided herein, (i) against the delivery of such
securities, or evidence of title to futures contracts or options on
futures contracts, to the Custodian or a Subcustodian registered
pursuant to Subsection 3.3 hereof or in proper form for transfer; (ii)
in the case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Subsection 3.8 hereof; or
(iii) in the case of repurchase agreements entered into between the Fund
and the Custodian, another bank or a broker-dealer (A) against delivery
of the Securities either in certificated form to the Custodian or a
Subcustodian or through an entry crediting the Custodian's account at
the appropriate Federal Reserve Bank with such Securities or (B) against
delivery of the confirmation evidencing purchase by the Fund of
Securities owned by the Custodian or such broker-dealer or other bank
along with written evidence of the agreement by the Custodian or such
broker-dealer or other bank to repurchase such Securities from the Fund;
(b) in connection with conversion, exchange or surrender
of Securities owned by the Fund as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by
the Fund;
(d) for the payment of any expense or liability incurred
by the Fund, including but not limited to the following payments for the
account of the Fund: custodian fees, interest, taxes, management,
accounting, transfer agent and legal fees and operating expenses of the
Fund whether or not such expenses are to be in whole or part capitalized
or treated as deferred expenses; and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 APPOINTMENT OF SUBCUSTODIANS. The Custodian may, upon
receipt of Proper Instructions, another bank or trust company, which is
itself qualified under the Investment Company Act to act as a custodian
(a "Subcustodian"), as the agent of the Custodian to carry out such of
the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian
shall not relieve the Custodian of its responsibilities or liabilities
hereunder.
3.8 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain Domestic Securities owned by a
Fund in a Securities System in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
(a) the Custodian may hold Domestic Securities of the Fund
in the Depository Trust Company or the Federal Reserve's book entry
system or, upon receipt of Proper Instructions, in another Securities
System provided that such securities are held in an account of the
Custodian in the Securities System ("Securities System Account") which
shall not include any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities
purchased for the account of the Fund upon (i) receipt of advice from
the Securities System that such securities have been transferred to the
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer Domestic Securities
sold for the account of the Fund upon (A) receipt of advice from the
Securities System that payment for such securities has been transferred
to the Securities System Account, and (B) the making of an entry on the
records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System
of transfers of Domestic Securities for the account of the Fund shall be
maintained for the Fund by the Custodian and be provided to the Fund at
its request. Upon request, the Custodian shall furnish the Fund
confirmation of the transfer to or from the account of the Fund in the
form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund
with any report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding domestic securities deposited in the Securities System.
3.9 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or
accounts for and on behalf of a Fund, into which account or accounts may
be transferred cash and/or Securities, including Securities maintained
in an account by the Custodian pursuant to Section 3.8 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer or futures commission merchant, relating
to compliance with the rules of registered clearing corporations and of
any national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of
segregating cash or securities in connection with options purchased,
sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, and (iii) for other proper
corporate purposes, but only, in the case of this clause (iii), upon
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
3.10 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of income or
other payments with respect to domestic securities of each Fund held by
it and in connection with transfers of such securities.
3.11 PROXIES. The Custodian shall, with respect to the
Securities held hereunder, promptly deliver to each Fund all proxies,
all proxy soliciting materials and all notices relating to such
Securities. If the Securities are registered otherwise than in the name
of a Fund or a nominee of a Fund, the Custodian shall use its best
reasonable efforts, consistent with applicable law, to cause all proxies
to be promptly executed by the registered holder of such Securities in
accordance with Proper Instructions.
3.12 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of
Securities and expirations of rights in connection therewith and notices
of exercise of put and call options written by the Fund and the maturity
of futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of Securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit
promptly to each Fund all written information received by the Custodian
from issuers of the Securities whose tender or exchange is sought and
from the party (or its agents) making the tender or exchange offer. If
a Fund desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the
Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 REPORTS BY CUSTODIAn. The Custodian shall each business
day furnish each Fund with a statement summarizing all transactions and
entries for the account of the Fund for the preceding day. At the end
of every month, the Custodian shall furnish each Fund with a list of the
cash and portfolio securities showing the quantity of the issue owned,
the cost of each issue and the market value of each issue at the end of
each month. Such monthly report shall also contain separate listings of
(a) unsettled trades and (b) when-issued securities. The Custodian
shall furnish such other reports as may be mutually agreed upon from
time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF
THE FUNDS HELD OUTSIDE THE UNITED STATES
4.1 CUSTODY OUTSIDE THE UNITED STATES. Each Fund authorizes
the Custodian to hold Foreign Securities and cash in custody accounts
which have been established by the Custodian with (i) its foreign
branches, (ii) foreign banking institutions, foreign branches of United
States banks and subsidiaries of United States banks or bank holding
companies (each a "Foreign Custodian") and (iii) Foreign Securities
depositories or clearing agencies (each a "Foreign Securities
Depository"); provided, however, that the appropriate Board or Executive
Committee has approved in advance the use of each such Foreign Custodian
and Foreign Securities Depository and the contract between the Custodian
and each Foreign Custodian and that such approval is set forth in Proper
Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary
of the appropriate Investment Company. Unless expressly provided to the
contrary in this Section 4, custody of Foreign Securities and assets
held outside the United States by the Custodian, a Foreign Custodian or
through a Foreign Securities Depository shall be governed by this
Agreement, including Section 3 hereof.
4.2 ASSETS TO BE HELD. The Custodian shall limit the
securities and other assets maintained in the custody of its foreign
branches, Foreign Custodians and Foreign Securities Depositories to:
(i) "foreign securities", as defined in paragraph (c) (1) of Rule 17f-5
under the Fund Act, and (ii) cash and cash equivalents in such amounts
as the Custodian or an affected Fund may determine to be reasonably
necessary to effect the Fund's Foreign Securities transactions.
4.3 OMITTED.
4.4 SEGREGATION OF SECURITIES. The Custodian shall identify
on its books and records as belonging to the appropriate Fund, the
Foreign Securities of each Fund held by each Foreign Custodian.
4.5 AGREEMENTS WITH FOREIGN CUSTODIANS. Each agreement
between the Custodian and a Foreign Custodian shall be substantially in
the form as delivered to the Investment Company for its Board's review,
and shall not be amended in a way that materially adversely affects any
Fund without the prior written consent of the Fund. Upon request, the
Custodian shall certify to the Funds that an agreement between the
Custodian and a Foreign Custodian meets the requirements of Rule 17f-5
under the 1940 Act.
4.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUNDS. Upon
request of a Fund, the Custodian will use its best reasonable efforts to
arrange for the independent accountants or auditors of the Fund to be
afforded access to the books and records of any Foreign Custodian
insofar as such books and records relate to the custody by any such
Foreign Custodian of assets of the Fund.
4.7 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNTS. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate
Foreign Custodian to transfer, exchange or deliver Foreign Securities
owned by a Fund, but, except to the extent explicitly provided herein,
only in any of the cases specified in Subsection 3.2. Upon receipt of
Proper Instructions, the Custodian shall pay out or instruct the
appropriate Foreign Custodian to pay out monies of a Fund in any of the
cases specified in Subsection 3.6. Notwithstanding anything herein to
the contrary, settlement and payment for Foreign Securities received for
the account of a Fund and delivery of Foreign Securities maintained for
the account of a Fund may be effected in accordance with the customary
or established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may
be maintained in the name of such entity or its nominee name to the same
extent as set forth in Section 3.3 of this Agreement and each Fund
agrees to hold any Foreign Custodian and its nominee harmless from any
liability as a holder of record of such securities.
4.8 LIABILITY OF FOREIGN CUSTODIAN. Each agreement between
the Custodian and a Foreign Custodian shall, unless otherwise mutually
agreed to by the Custodian and a Fund, require the Foreign Custodian to
exercise reasonable care or, alternatively, impose a contractual
liability for breach of contract without an exception based upon a
standard of care in the performance of its duties and to indemnify and
hold harmless the Custodian from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
Foreign Custodian's performance of such obligations. At the election of
a Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim
if and to the extent that the Fund has not been made whole for any such
loss, damage, cost, expense, liability or claim, unless such subrogation
is prohibited by local law.
4.9 MONITORING RESPONSIBILITIES.
(a) The Custodian will promptly inform each Fund in the
event that the Custodian learns of a material adverse change in the
financial condition of a Foreign Custodian or learns that a Foreign
Custodian's financial condition has declined or is likely to decline
below the minimum levels required by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist the Investment Company's Board in its
annual review and approval of the continuance of all contracts or
arrangements with Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in
Writing which the Custodian believes in good faith to have been given by
Authorized Persons (as defined below) or which are transmitted with
proper testing or authentication pursuant to terms and conditions which
the Custodian may specify. Any Proper Instructions delivered to the
Custodian by telephone shall promptly thereafter be confirmed in
accordance with procedures, and limited in subject matter, as mutually
agreed upon by the parties. Unless otherwise expressly provided, all
Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect
to Proper Instructions, any Proper Instructions given by the Funds
thereafter shall be given and processed in accordance with such terms
and conditions for the use of such arrangements, methods or devices as
the Custodian may put into effect and modify from time to time. The
Funds shall safeguard any testkeys, identification codes or other
security devices which the Custodian shall make available to them. The
Custodian may electronically record any Proper Instructions given by
telephone, and any other telephone discussions, with respect to its
activities hereunder. As used in this Agreement, the term "Authorized
Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the Board or Executive
Committee, a certified copy of which has been provided to the Custodian,
to act on behalf of the Fund under this Agreement. Each of such persons
shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is
no longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority
from a Fund:
(a) make payments to itself or others for minor expenses
of handling Securities or other similar items relating to its duties
under this Agreement, provided that all such payments shall be accounted
for to the Fund;
(b) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and
other dealings with the Securities and property of the Fund except as
otherwise provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any
instructions (conveyed by telephone or in Writing), notice, request,
consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly given or executed by or on behalf of a
Fund. The Custodian may receive and accept a certified copy of a
resolution of the Board or Executive Committee as conclusive evidence
(a) of the authority of any person to act in accordance with such
resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution
may be considered as in full force and effect until receipt by the
Custodian of written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary
information in its possession (to the extent permissible under
applicable law) to the entity or entities appointed by the Board to keep
the books of account of a Fund and/or compute the net asset value per
Share of the outstanding Shares of a Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to
its activities under this Agreement which are required with respect to
such activities under Section 31 of the Investment Company Act and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of
the Investment Company and shall at all times during the regular
business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Investment Company and
employees and agents of the Securities and Exchange Commission. The
Custodian shall, at a Fund's request, supply the Fund with a tabulation
of Securities and Cash owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as
shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian, as agreed upon from time to time
between the Investment Company, on behalf of each Fund, and the
Custodian. In addition, should the Custodian in its discretion advance
funds (to include overdrafts) to or on behalf of a Fund pursuant to
Proper Instructions, the Custodian shall be entitled to prompt
reimbursement of any amounts advanced. In the event of such an advance,
and to the extent permitted by the 1940 Act and the Fund's policies, the
Custodian shall have a continuing lien and security interest in and to
the property of the Fund in the possession or control of the Custodian
or of a third party acting in the Custodian's behalf, until the advance
is reimbursed. Nothing in this Agreement shall obligate the Custodian
to advance funds to or on behalf of a Fund, or to permit any borrowing
by a Fund except for borrowings for temporary purposes, to the extent
permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only
such duties as are set forth herein or contained in Proper Instructions
and shall use reasonable care in carrying out such duties. The
Custodian shall be liable to a Fund for any loss which shall occur as
the result of the failure of a Foreign Custodian engaged directly or
indirectly by the Custodian to exercise reasonable care with respect to
the safekeeping of securities and other assets of the Fund to the same
extent that the Custodian would be liable to the Fund if the Custodian
itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise
reasonable care with regard to any decision or recommendation made by
the Custodian or Subcustodian regarding the use or continued use of a
Foreign Securities Depository. In the event of any loss to a Fund by
reason of the failure of the Custodian or a Foreign Custodian to utilize
reasonable care, the Custodian shall be liable to the Fund to the extent
of the Fund's damages, to be determined based on the market value of the
property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or
circumstances. The Custodian shall be held to the exercise of
reasonable care in carrying out this Agreement, and shall not be liable
for acts or omissions unless the same constitute negligence or willful
misconduct on the part of the Custodian or any Foreign Custodian engaged
directly or indirectly by the Custodian. Each Fund agrees to indemnify
and hold harmless the Custodian and its nominees from all taxes,
charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominees in
connection with the performance of this Agreement with respect to such
Fund, except such as may arise from any negligent action, negligent
failure to act or willful misconduct on the part of the indemnified
entity or any Foreign Custodian. The Custodian shall be entitled to
rely, and may act, on advice of counsel (who may be counsel for a Fund)
on all matters and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed
in respect of Securities held by the Custodian, agent, Subcustodian or
Foreign Custodian hereunder shall be made at the risk of the Funds. The
Custodian shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Custodian, agent, Subcustodian or by
a Foreign Custodian of any payment, redemption or other transaction
regarding securities in respect of which the Custodian has agreed to
take action as provided in Section 3 hereof. The Custodian shall not be
liable for any action taken in good faith upon Proper Instructions or
upon any certified copy of any resolution of the Board and may rely on
the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian
shall not be liable for any loss resulting from, or caused by, the
direction of a Fund to maintain custody of any Securities or cash in a
foreign country including, but not limited to, losses resulting from
nationalization, expropriation, currency restrictions, civil
disturbance, acts of war or terrorism, insurrection, revolution, nuclear
fusion, fission or radiation or other similar occurrences, or events
beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect
thereto, that may be levied or assessed upon or in respect of any assets
of any Fund held by the Custodian.
Section 12. LIMITED LIABILITY OF THE INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in the Investment
Company's Agreement and Declaration of Trust, Articles of Incorporation,
or Agreement of Limited Partnership. The Custodian agrees that each
Fund's obligation hereunder shall be limited to the assets of the Fund,
and that the Custodian shall not seek satisfaction of any such
obligation from the shareholders of the Fund nor from any Board Member,
officer, employee, or agent of the Fund or the Investment Company on
behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated
as hereinafter provided. This Agreement may be terminated by the
Investment Company, on behalf of a Fund, or by the Custodian by 90 days
notice in Writing to the other provided that any termination by the
Investment Company shall be authorized by a resolution of the Board, a
certified copy of which shall accompany such notice of termination, and
provided further, that such resolution shall specify the names of the
persons to whom the Custodian shall deliver the assets of the affected
Funds held by the Custodian. If notice of termination is given by the
Custodian, the Investment Company shall, within 90 days following the
giving of such notice, deliver to the Custodian a certified copy of a
resolution of the Board specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the
Custodian. In either case the Custodian will deliver such assets to the
persons so specified, after deducting therefrom any amounts which the
Custodian determines to be owed to it hereunder (including all costs and
expenses of delivery or transfer of Fund assets to the persons so
specified). If within 90 days following the giving of a notice of
termination by the Custodian, the Custodian does not receive from the
Investment Company certified copies of resolutions of the Board
specifying the names of the persons to whom the Custodian shall deliver
the assets of the Funds held by the Custodian, the Custodian, at its
election, may deliver such assets to a bank or trust company doing
business in the State of California to be held and disposed of pursuant
to the provisions of this Agreement or may continue to hold such assets
until a certified copy of one or more resolutions as aforesaid is
delivered to the Custodian. The obligations of the parties hereto
regarding the use of reasonable care, indemnities and payment of fees
and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 RELATIONSHIP. Nothing contained in this Agreement shall
(i) create any fiduciary, joint venture or partnership relationship
between the Custodian and any Fund or (ii) be construed as or constitute
a prohibition against the provision by the Custodian or any of its
affiliates to any Fund of investment banking, securities dealing or
brokerages services or any other banking or financial services.
14.2 FURTHER ASSURANCES. Each party hereto shall furnish to
the other party hereto such instruments and other documents as such
other party may reasonably request for the purpose of carrying out or
evidencing the transactions contemplated by this Agreement.
14.3 ATTORNEYS' FEES. If any lawsuit or other action or
proceeding relating to this Agreement is brought by a party hereto
against the other party hereto, the prevailing party shall be entitled
to recover reasonable attorneys' fees, costs and disbursements
(including allocated costs and disbursements of in-house counsel), in
addition to any other relief to which the prevailing party may be
entitled.
14.4 NOTICES. Except as otherwise specified herein, each
notice or other communication hereunder shall be in Writing and shall be
delivered to the intended recipient at the following address (or at such
other address as the intended recipient shall have specified in a
written notice given to the other parties hereto):
if to a Fund or Investmentif to the Custodian:
Company:
Templeton Variable ProductsState Street Bank and Trust
Series Fund Company
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. 1776 Heritage Drive
San Mateo, CA 94404 North Quincy, MA 02171
Attention: Chief Legal
Officer
14.5 HEADINGS. The underlined headings contained herein are
for convenience of reference only, shall not be deemed to be a part of
this Agreement and shall not be referred to in connection with the
interpretation hereof.
14.6 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original and both of
which, when taken together, shall constitute one agreement.
14.7 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the State
of New York (without giving effect to principles of conflict of laws).
14.8 FORCE MAJEURE. Notwithstanding the provisions of
Section 11 hereof regarding the Custodian's general standard of care, no
failure, delay or default in performance of any obligation hereunder
shall constitute an event of default or a breach of this agreement, or
give rise to any liability whatsoever on the part of one party hereto to
the other, to the extent that such failure to perform, delay or default
arises out of a cause beyond the control and without negligence of the
party otherwise chargeable with failure, delay or default; including,
but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood;
war; riot; theft; earthquake; natural disaster; breakdown of public or
common carrier communications facilities; computer malfunction; or act,
negligence or default of the other party. This paragraph shall in no
way limit the right of either party to this Agreement to make any claim
against third parties for any damages suffered due to such causes.
14.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns, if any.
14.10 WAIVER. No failure on the part of any person to
exercise any power, right, privilege or remedy hereunder, and no delay
on the part of any person in the exercise of any power, right, privilege
or remedy hereunder, shall operate as a waiver thereof; and no single or
partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power,
right, privilege or remedy.
14.11 AMENDMENTS. This Agreement may not be amended,
modified, altered or supplemented other than by means of an agreement or
instrument executed on behalf of each of the parties hereto.
14.12 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any person or set
of circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than
those as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall
continue to be valid and enforceable to the fullest extent permitted by
law.
14.13 PARTIES IN INTEREST. None of the provisions of this
Agreement is intended to provide any rights or remedies to any person
other than the Investment Companies, for themselves and for the Funds,
and the Custodian and their respective successors and assigns, if any.
14.14 PRE-EMPTION OF OTHER AGREEMENTS. In the event of any
conflict between this Agreement, including without limitation any
amendments hereto, and any other agreement which may now or in the
future exist between the parties, the provisions of this Agreement shall
prevail.
14.15 VARIATIONS OF PRONOUNS. Whenever required by the
context hereof, the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and neuter
genders; and the neuter gender shall include the masculine and feminine
genders.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered as of the date first above
written.
State Street Bank and Trust Company
By: _____________________________
Ronald Logue
Its: _____________________________
Executive Vice President
Templeton Variable Products Series Funds
By: ______________________________
()
Its:
Vice President & Secretary
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By:
Title: Senior Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By:
Harmon E. Burns
Title: Vice President
By:
Deborah R. Garzek
Title: Vice President & Secretary
CLASS 2 DISTRIBUTION PLAN
I. Investment Company: TEMPLETON VARIABLE PRODUCTS SERIES FUND
II. Funds: TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON STOCK FUND
FRANKLIN GROWTH INVESTMENTS FUND
MUTUAL SHARES INVESTMENTS FUND
MUTUAL DISCOVERY INVESTMENTS FUND
PREAMBLE TO CLASS 2 DISTRIBUTION PLAN
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("Investment Company") is an open-end
management investment company organized as a Massachusetts business trust, which
offers the shares of beneficial interest of its series (each, a "Fund") to
certain life insurance companies ("Insurance Companies") for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
"Variable Contracts").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the class 2 (the "Class") shares of each Fund named above, which
Plan shall take effect on the date class 2 shares of the Funds are first offered
(the "Effective Date of the Plan"). The Plan has been approved by a majority of
the Board of Trustees of the Investment Company (the "Board"), including a
majority of the Board members who are not interested persons of the Investment
Company and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Board members"), cast in person at a meeting
called for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit each Fund and its Class 2
shareholders.
DISTRIBUTION PLAN
1. Each Fund shall pay Distributors, the Insurance Companies or others to assist
in the promotion and distribution of Class 2 shares or Variable Contracts
offering Class 2 shares. Payments made under the Plan may be used for, among
other things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts. Payments made
under the Plan may also be used to pay Insurance Companies, dealers or others
for, among other things, furnishing personal services and maintaining customer
accounts and records, or as service fees as defined under NASD rules. Agreements
for the payment of fees to the Insurance Companies or others shall be in a form
which has been approved from time to time by the Board, including the
non-interested Board members.
2. The maximum amount which may be paid by each Fund shall be a percentage, as
indicated on Schedule A, per annum of the average daily net assets represented
by shares of the Fund's Class 2. These payments shall be made quarterly by each
Fund to Distributors, the Insurance Companies or others. Expenses in excess of
these maximum annual rates that otherwise qualify for payment shall not be
carried forward into successive annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to a Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 2 shares of any Fund at any time, without
penalty, by vote of a majority of the outstanding Class 2 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Management Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by any Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 2 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 2 shares of each Fund, and
Distributors as evidenced by their execution hereof.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: ____________________
[NAME]
[TITLE]
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: ____________________
[NAME]
[TITLE]
[DATE]
TEMPLETON VARIABLE PRODUCTS SERIES FUND
CLASS 2 DISTRIBUTION PLAN
Schedule A
The following are the maximum amounts each Fund may pay under the accompanying
Class 2 Distribution Plan, stated as a percentage per year of Class 2's average
daily net assets represented by shares of Class 2.
FUND NAME MAXIMUM ANNUAL PAYMENT RATE
TEMPLETON ASSET ALLOCATION FUND 0.25%
TEMPLETON BOND FUND 0.15%
TEMPLETON DEVELOPING MARKETS FUND 0.25%
TEMPLETON INTERNATIONAL FUND 0.25%
TEMPLETON STOCK FUND 0.25%
FRANKLIN GROWTH INVESTMENTS FUND 0.25%
MUTUAL SHARES INVESTMENTS FUND 0.25%
MUTUAL DISCOVERY INVESTMENTS FUND 0.25%
POWER OF ATTORNEY
The undersigned officers and Trustees of TEMPLETON VARIABLE
PRODUCTS SERIES FUND (the "Registrant") hereby appoint Allan S. Mostoff,
Jeffrey L. Steele, William J. Kotapish, Deborah R. Gatzek, Barbara J. Green,
Larry L. Greene, Karen L. Skidmore, and Joan E. Boros (with full power to
each of them to act alone) his attorney-in-fact and agent, in all capacities,
to execute, and to file any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority.
Each of the undersigned grants to each of said attorneys, full authority to
do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes as he could do if personally present, thereby
ratifying all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and Trustees hereby execute this Power
of Attorney as of this 12th day of December, 1996.
/s/ Harris J. Ashton, Trustee /s/ Betty P. Krahmer, Trustee
/s/ Nicholas F. Brady, Trustee /s/ Gordon S. Macklin, Trustee
/s/ S. Joseph Fortunato, Trustee /s/ Fred R. Millsaps, Trustee
/s/ Andrew H. Hines, Jr., Trustee /s/ Hasso-G Von Diergardt-Naglo, Trustee
/s/ Charles B. Johnson, Trustee /s/ Charles E. Johnson, President
/s/ James R. Baio, Treasurer
