[TFAC Letterhead]
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IMPORTANT INFORMATION FOR CONTRACT OWNERS OF
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TEMPLETON RETIREMENT ANNUITY
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OR
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TEMPLETON IMMEDIATE VARIABLE ANNUITY
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Templeton Funds Annuity Company
100 Fountain Parkway
St. Petersburg, FL 33716-1205
tel 800/237-0738
December 17, 1997
IMPORTANT INFORMATION FOR CONTRACT OWNERS OF
TEMPLETON RETIREMENT ANNUITY
OR TEMPLETON IMMEDIATE VARIABLE ANNUITY
It is time for you to vote on a critical issue affecting your annuity contract.
The enclosed documents announce and explain a proposal which will be considered
at a Special Shareholders Meeting of Templeton Variable Annuity Fund which has
been called for February 3, 1998 at 10:00 a.m., Eastern Time, at 500 East
Broward Blvd., Fort Lauderdale, Florida 33394-3091. We request that you respond
promptly by means of the enclosed voting instruction card.
What will be decided at the Meeting?
This meeting is critically important as you are being asked to consider and
approve an Agreement and Plan of Reorganization (the "Merger Plan") which would
in effect merge Templeton Variable Annuity Fund (the "Variable Annuity Fund")
with a similar fund called the Templeton Stock Fund (the "Stock Fund"), a series
of Templeton Variable Products Series Fund ("TVPSF"). Templeton Funds Annuity
Company ("TFAC"), the issuer of your annuity contract, holds all shares of the
Variable Annuity Fund in separate accounts for the purpose of funding annuity
payments for Templeton Retirement Annuity and Templeton Immediate Variable
Annuity contracts ("Contracts"). If the Merger Plan is approved, the TFAC
separate accounts would receive Stock Fund Class 1 shares equal in value to
their Variable Annuity Fund shares. The Merger Plan will not affect your
Contract rights, except that variable payments will depend on the performance of
the Stock Fund Class 1 instead of the Variable Annuity Fund.
Why is the Merger Plan being proposed?
The Variable Annuity Fund is a relatively small fund, with just over $17.5
million in assets as of September 30, 1997. The Fund will almost certainly get
even smaller, because TFAC is no longer selling the immediate variable annuity
Contracts and the Variable Annuity Fund's assets shrink with every annuity
payment made to Contract owners. In general, shrinking assets are not considered
good for a fund's investment performance, because the portfolio managers may
have less flexibility to make investments and the fund's operating expenses may
consume a larger percentage of the remaining assets. The Stock Fund is very
similar to the Variable Annuity Fund, but much larger with over $834 million in
assets as of September 30, 1997. The Stock Fund has the same portfolio managers
and investment objectives as the Variable Annuity Fund, and very similar
investment policies and strategies. Moreover, the Stock Fund is available in
variable insurance contracts that are actively being sold, so it is less likely
to have shrinking assets.
When will the merger be complete?
April 30, 1998 is the anticipated date of the merger, assuming shareholders
approve the Merger Plan and each party has satisfied its obligations under the
Merger Plan.
How can I vote on the Merger Plan?
You will be able to give TFAC voting instructions for those shares attributable
to your annuity contract as of the record date for the Shareholder Meeting,
November 28, 1997. The voting instruction card is, in essence, a ballot. When
you complete your voting instruction card, it tells TFAC how to vote its proxy.
If you complete and sign the voting instruction card, the shares attributable to
your annuity contract will be voted as you instruct. If you simply sign and
return the card, the shares will be voted in favor of the Board's
recommendations. If you do not return the card, the shares will be voted in the
same proportion as shares for which instructions have been received from other
contract owners.
We urge you to spend a few minutes with the proxy statement reviewing the
proposal at hand. Then, fill out your voting instruction card and return it. We
want to know how you would like TFAC to vote and welcome your comments. Please
take a few minutes with these materials and return your voting instruction card.
If you have any questions, please call 1-800/774-5001.
Thank you for your attention to this matter.
Sincerely,
Richard P. Austin
President, Templeton Funds Annuity Company
WE URGE YOU TO MARK, SIGN, DATE AND MAIL THE ENCLOSED VOTING INSTRUCTION CARD IN
THE POSTAGE-PAID ENVELOPE PROVIDED SO YOUR VIEWS WILL BE REPRESENTED AT THE
MEETING.
TEMPLETON VARIABLE ANNUITY FUND
500 East Broward Blvd.
Fort Lauderdale, Florida 33394-3091
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on February 3, 1998
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of the Templeton
Variable Annuity Fund (the "Variable Annuity Fund"), will be held at the
principal executive offices of the Variable Annuity Fund at 500 East Broward
Blvd., Fort Lauderdale, Florida 33394-3091 on February 3, 1998, at 10:00 a.m.,
Eastern Time, for the following reasons:
1. To approve or disapprove an Agreement and Plan of Reorganization
("Merger Plan") between the Variable Annuity Fund and Templeton Variable
Products Series Fund ("TVPSF") on behalf of its Templeton Stock Fund series
(the "Stock Fund"). This Agreement provides for the acquisition of
substantially all of the assets of the Variable Annuity Fund in exchange
for shares in the Templeton Stock Fund Class 1, the distribution of such
shares to the shareholders of the Variable Annuity Fund, and the
liquidation and dissolution of the Variable Annuity Fund. The merger is
anticipated to be completed on April 30, 1998.
2. To vote upon any other business as may properly come before the Special
Meeting or any adjournment thereof.
The transaction contemplated by the Merger Plan is described in the attached
Prospectus/Proxy Statement. A copy of the Merger Plan is attached in Exhibit A
thereto.
Shareholders of record as of the close of business on November 28, 1997, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
By Order of the Board of Trustees,
Barbara J. Green
Secretary
December 17, 1997
Page
Cover Page Cover
SUMMARY 2
What is the Merger Plan? 2
Who is eligible to vote? 2
What vote is required? 2
Can I revoke my voting instruction? 3
How will this affect my Contract rights? 3
How does the VAF Board recommend
that I vote? 3
What are the tax consequences? 3
How do the important features compare? 3
What are the investment objectives? 3
What are the investment policies? 3
What are the risk factors? 4
Who manages the TVPSF Stock Fund
and Variable Annuity Fund? 4
How are the Funds organized? 4
What are the Funds' Expenses? 4
How are shares bought and sold? 5
When are dividends and distributions made? 5
COMPARISON OF INVESTMENT
POLICIES AND RISKS
What are the Funds' investment objectives? 5
What are the Funds' investment policies? 5
What are the Funds' investment restrictions? 6
What are the Funds' risk factors? 7
Page
INFORMATION ABOUT THE FUNDS 7
REASONS FOR THE MERGER PLAN 8
What factors did the Trustees consider
prior to recommending approval of the
Merger Plan? 8
INFORMATION ABOUT THE MERGER PLAN 9
How will the Merger Plan be carried out? 9
What are the conditions precedent
to closing? 10
Who will pay the expenses of the
Merger Plan? 10
What are the tax considerations? 10
What rights do the Stock Fund Class 1
shareholders have? 10
How would the Merger Plan change
the Funds' statement of capital? 11
VOTING INFORMATION AND
PRINCIPAL STOCKHOLDERS 11
THE FUNDS' SERVICE PROVIDERS 12
Who is the investment manager? 12
Who are the business manager and
transfer agent? 12
Who is the distributor? 13
Who is the custodian? 13
Exhibit A - Form of Agreement and Plan of
Reorganization
Exhibit B - Prospectus Dated May 1, 1997,
as amended December 1, 1997, of TVPSF
Stock Fund - Class 1
Exhibit C - Annual Report December 31, 1996
of TVPSFStock Fund (enclosed)
Enclosure - Voting Instruction Card
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated December 17,1997
ACQUISITION OF THE ASSETS OF THE
TEMPLETON VARIABLE ANNUITY FUND
BY AND IN EXCHANGE FOR CLASS 1 SHARES OF THE TEMPLETON STOCK FUND,
A SERIES OF THE TEMPLETON VARIABLE PRODUCTS SERIES FUND
This Prospectus/Proxy Statement is being sent to you in connection with the
solicitation of proxies by the Board of Trustees of Templeton Variable Annuity
Fund (the "Variable Annuity Fund"). The Variable Annuity Fund is an open-end
diversified management investment company. Shares of the Fund are sold only to
separate accounts of Templeton Funds Annuity Company ("TFAC"), a licensed
insurance company, for use as the sole funding vehicle for Templeton Retirement
Annuities and Templeton Immediate Variable Annuities (collectively, the
"Contracts").
Proxies solicited will be voted at a Special Meeting of Shareholders (the
"Meeting") to approve or disapprove an Agreement and Plan of Reorganization (the
"Merger Plan"). The Meeting will be held at the offices of the Fund which are
located at 500 East Broward Blvd., Fort Lauderdale, Florida 33394-3091 on
February 3, 1998, at 10:00 a.m., Eastern Time. The Merger Plan provides for the
acquisition of substantially all of the assets of the Variable Annuity Fund by,
and in exchange for shares of, the Templeton Stock Fund (the "Stock Fund"), a
series of Templeton Variable Products Series Fund ("TVPSF"). Following this
exchange, the TFAC separate accounts will receive Stock Fund Class 1 shares
having an aggregate net asset value equal to the aggregate net asset value of
all shares of the Variable Annuity Fund. Stock Fund Class 1 shares will then be
used by TFAC in place of Variable Annuity Fund shares to fund the benefits and
annuity income payments to owners of the Contracts ("Contract Owners").
TVPSF also is an open-end, diversified management investment company, with
principal offices located at 500 East Broward Blvd., Fort Lauderdale, Florida
33394-3091. Both the Stock Fund and the Variable Annuity Fund (the "Funds") are
managed by Templeton Investment Counsel, Inc. ("TICI"). The Funds also share the
same investment objective, namely long-term growth of capital, and they have
nearly the same investment policies and strategies. The Funds invest primarily
in stocks of companies of any nation around the world. Stock Fund Class 1 shares
and Variable Annuity Fund shares are both sold only to insurance companies, for
use in variable insurance products, at net asset value with no sales charges or
Rule 12b-1 distribution fees.
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about the Stock Fund that a prospective
investor should know before investing. This Prospectus/Proxy Statement is
accompanied by the current prospectus of the Stock Fund, which is incorporated
by reference into this Prospectus/ Proxy Statement and attached hereto as
Exhibit B. A Statement of Additional Information dated May 1, 1997, relating to
this Prospectus/Proxy Statement, the transactions described herein and the
parties thereto, has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus/Proxy Statement. A copy of
that Statement may be obtained without charge by writing to the address noted
above or by calling 1-800/774-5001. The Variable Annuity Fund's Prospectus and a
Statement of Additional Information, dated May 1, 1997, and its Annual Report
for the year ended December 31, 1996, and Semi-Annual Report for the six-months
ended June 30, 1997 are also on file with the Securities and Exchange
Commission; each of these documents is incorporated by reference herein and is
available without charge upon request to the Variable Annuity Fund. This
Prospectus/Proxy Statement will be sent to shareholders on or about December 17,
1997.
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 FEDERAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY TVPSF OR THE STOCK FUND.
SHARES OF THE STOCK FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF
THE STOCK FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
SUMMARY
This is a summary of the more complete information contained later in this
Prospectus/Proxy Statement, which includes the Merger Plan, the Stock Fund Class
1 Prospectus and Annual Report attached as Exhibits A, B and C, respectively.
What is the Merger Plan?
The Merger Plan provides for the transfer of substantially all of the assets of
the Variable Annuity Fund to the Stock Fund, in exchange for Stock Fund Class 1
shares equal in value to the assets of the Variable Annuity Fund. The Stock Fund
Class 1 shares issued to the Variable Annuity Fund will then be distributed to
TFAC on behalf of the separate accounts. As a result, the TFAC separate accounts
will cease to be shareholders of the Variable Annuity Fund and will instead own
Stock Fund Class 1 shares having an aggregate net asset value equal to all
shares of the Variable Annuity Fund at the time of the merger. The merger is
anticipated to be completed on April 30, 1998. TFAC will then use Stock Fund
Class 1 shares in place of Variable Annuity Fund shares to fund the benefits and
annuity income payments to Contract Owners.
At a meeting held on October 18, 1997, the Board of Trustees of the Variable
Annuity Fund (the "VAF Board"), including a majority of the Independent
Trustees, defined as those who are not "interested persons" of the Fund under
the Investment Company Act of 1940, as amended (the "1940 Act"), approved the
Merger Plan. For the reasons set forth below under "Reasons for the Merger
Plan," the VAF Board, including all of the Independent Trustees present at the
meeting, concluded that the Merger Plan is in the best interests of the
shareholders of the Variable Annuity Fund and, based on TFAC's representations,
in the best interests of Contract Owners. Therefore, the VAF Board recommends
approval of the Merger Plan. The VAF Board and the Board of Trustees of TVPSF
(the "TVPSF Board"), respectively, also concluded that no dilution would result
to the shareholders of the Funds as a result of the Merger Plan. This means that
TFAC will receive Stock Fund shares equal in value to the shares of the Variable
Annuity Fund, and both Funds calculate their share values or "net asset values"
in the same way.
Who is eligible to vote?
Shareholders of record at the close of business on November 28, 1997 (the
"Record Date"), are entitled to be present and to vote at the Meeting or any
adjourned Meeting. Contract Owners as of the Record Date may provide voting
instructions to TFAC by mail or in person at the Meeting.
As of the Record Date, TFAC, on behalf of the separate accounts, was the sole
shareholder of record of the Variable Annuity Fund. TFAC will vote shares of the
Fund held by it in accordance with voting instructions received from Contract
Owners for whose accounts the shares are held. This Proxy Statement will be used
by TFAC to receive voting instructions from Contract Owners. The Notice of
Meeting, the proxy (or voting instruction card), and the proxy statement were
mailed to TFAC and Contract Owners on or about December 17, 1997.
Shareholders. Each share is entitled to one vote. Shares represented by
duly executed proxies will be voted in accordance with the Contract Owner's
instructions.
Contract Owners. If a Contract Owner returns a properly executed voting
instruction card with express voting instructions, TFAC will vote those
shares in accordance with the Contract Owner's instructions. In the event
that a Contract Owner gives no instructions by not returning a voting
instruction card, TFAC will vote the shares of the Fund attributable to the
Contract Owner in the same proportion as shares of that Fund for which it
has received instructions. If a Contract Owner returns the voting
instruction card properly signed but with no express voting instructions
indicated on the card, TFAC will vote the shares in accordance with the VAF
Board's recommendations.
What vote is required?
The affirmative vote or written consent of the holders of a majority of the
outstanding shares of the Variable Annuity Fund on the Record Date is necessary
to approve the Merger Plan. TFAC will be entitled to one vote for each share of
the Variable Annuity Fund held on the Record Date.
Can I revoke my voting instructions?
Contract Owners may revoke their voting instructions at any time before the
proxy is voted by (1) delivering a written revocation to the Secretary of the
Variable Annuity Fund, (2) signing and forwarding to the Variable Annuity Fund
later-dated instruction cards, or (3) attending the Meeting and instructing TFAC
in person.
How will this affect my Contract rights?
TFAC has advised the VAF Board that as Contract Owners in an immediate variable
annuity, you will continue to receive income payments according to the payout
option you have chosen under the Contract prospectus. The Merger Plan will not
affect your Contract rights, except that variable payments will depend on the
performance of the Stock Fund Class 1 instead of the Variable Annuity Fund.
How does the VAF Board recommend that I vote?
The Variable Annuity Fund is a relatively small fund, with just over $17.5
million in assets as of September 30, 1997. The Fund will almost certainly get
even smaller, because TFAC is no longer selling the immediate variable annuity
Contracts and the Variable Annuity Fund's assets shrink with every annuity
payment made to Contract owners. In general, shrinking assets are not considered
good for a fund's investment performance, because the portfolio managers may
have less flexibility to make investments and the fund's operating expenses may
consume a larger percentage of the remaining assets. The Stock Fund is very
similar to the Variable Annuity Fund, but much larger with over $834 million in
assets as of September 30, 1997. The Stock Fund has the same portfolio managers
and investment objectives as the Variable Annuity Fund, and very similar
investment policies and strategies. Moreover, the Stock Fund is available in
Variable insurance contracts that are actively being sold, so it is less likely
to have shrinking assets.
The VAF Board concluded at its October meeting that the Merger Plan is in your
best interests and, therefore, recommend that you instruct TFAC to vote for the
merger. The VAF Board does not intend to bring any matters before the Meeting
other than the proposals described below and is not currently aware of any other
matters to be presented. Proxyholders to whom discretion has been granted will
vote shares in accordance with the views of management if any other matter
legally comes before the Meeting.
THE BOARD RECOMMENDS A VOTE FOR THE MERGER.
What are the tax consequences?
In the opinion of Dechert Price & Rhoads, tax counsel to the Funds, based on
certain assumptions and representations received from the Variable Annuity Fund
and TVPSF, it is not expected that shareholders of the Variable Annuity Fund
will recognize any gain or loss for federal income tax purposes as a result of
the exchange of their Variable Annuity Fund shares for Class 1 shares of the
Stock Fund or that the Stock Fund will recognize any gain or loss upon receipt
of the Variable Annuity Fund assets. For further information about the tax
consequences of the Merger Plan, see "INFORMATION ABOUT THE MERGER PLAN - Tax
Considerations" below.
How do the important features of the funds compare?
Because the Funds are dedicated insurance products funds, managed by the same
individual portfolio managers and in a substantially similar manner, the
following discussion is virtually identical for both Funds with the minor
differences outlined below.
What are the investment objectives?
The investment objective of both the Stock Fund and the Variable Annuity
Fund is long-term growth of capital.
What are the investment policies?
The Stock Fund pursues its investment objective by investing primarily in
common stocks issued by companies, large and small, in various nations
throughout the world. The Stock Fund will maintain at least 65% of its
assets in common and preferred stocks, under normal market conditions.
The Variable Annuity Fund uses a flexible policy of investing in stocks and debt
obligations of companies and governments of any nation. Similar to the Stock
Fund, the Variable Annuity Fund has normally maintained at least 65% of its
assets in common and preferred stocks, and the investment managers have no
current plan to change this strategy.
What are the risk factors?
Because the Funds have substantially similar investment objectives and policies,
the investment risks associated with an investment in the Stock Fund are
essentially the same as those of the Variable Annuity Fund. (see "COMPARISON OF
INVESTMENT POLICIES - Risks Factors" below.) Risks of investments in the Stock
Fund are outlined in greater detail in the accompanying prospectus of the Stock
Fund.
Who manages the TVPSF Stock Fund and the Variable Annuity Fund?
The management of the business and affairs of TVPSF, on behalf of the Stock
Fund, and of the Variable Annuity Fund is the responsibility of their respective
Boards of Trustees. All of the trustees (except John William Galbraith) of the
Variable Annuity Fund are currently Trustees of TVPSF.
The investment manager for both the Stock Fund and the Variable Annuity Fund is
Templeton Investment Counsel, Inc. ("TICI"), which manages the investment and
reinvestment of the assets of the Funds.
How are the Funds organized?
The Variable Annuity Fund and TVPSF are both Massachusetts business trusts,
organized on February 5, 1987 and February 25, 1988, respectively.
The Funds are open-end management investment companies which means they can make
ongoing sales of their shares and TICI can invest the net proceeds in diverse
assets consistent with their investment objectives.
What are the Funds' Expenses?
The tables below show the actual expenses for each Fund for the six-months ended
June 30, 1997, as well as hypothetical estimated or "pro forma" figures which
show what expenses would have been if the Funds had been merged during this
six-month period.
FEE TABLE FOR THE
VARIABLE ANNUITY FUND AND THE STOCK FUND CLASS 1
FOR THE 6 MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Pro Forma for
the Stock Fund
Stock Fund- Variable Annuity Class 1
Class 1 Fund After Merger
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Shareholder Transaction Expenses
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 0.00% 0.00% 0.00%
Annual Fund Operating Expenses
(as percentage of average net assets):
Management Fees 0.70%* 0.50% 0.70%
Other Expenses 0.18% 0.36% 0.18%
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Total Operating Expenses 0.88%* 0.86% 0.88%
</TABLE>
*Management fees and total operating expenses have been restated to reflect
the management fee schedule approved by shareholders and effective May 1,
1997. Actual management fees and total fund operating expenses before May
1, 1997 were lower.
EXAMPLE:
Based on the level of expenses listed above, an investor would pay the
following expenses on a $1,000 investment, assuming a 5% annual return and
redemption at the end of each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Stock Fund $9 $28 $49 $108
Variable Annuity Fund $9 $27 $48 $106
Pro Forma for Stock Fund (after Merger) $9 $28 $49 $108
</TABLE>
The foregoing tables are designed to assist the investor in understanding
the various costs and expenses that a shareholder will bear directly or
indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN. (see "What factors did the VAF Board consider prior to recommending
approval of the Merger Plan?")
How are shares bought and sold?
Both Funds are sold only to insurance company separate accounts at their
respective net asset values and are redeemed at their respective net asset
values. Individuals may not purchase these shares directly from the Funds.
Shares of the Stock Fund serve as the underlying investment vehicle for
both variable annuity and variable life insurance contracts. Shares of the
Variable Annuity Fund serve as the underlying investment vehicle for
variable annuity contracts only.
When are dividends and distributions made?
The Stock Fund and the Variable Annuity Fund normally intend to pay an
annual dividend representing substantially all of their net investment
income and to distribute annually any net realized capital gains.
COMPARISON OF INVESTMENT POLICIES AND RISKS
The Stock Fund and the Variable Annuity Fund share the same investment
objective, which is to seek long-term growth of capital. The Funds are guided by
substantially similar investment strategies and policies by which they seek to
obtain the objective, and they are subject to substantially similar investment
restrictions and risks. They are also managed by the same individual portfolio
managers within the same investment advisory company, TICI. Because of the
similar manner in which they are run, the following discussion is virtually
identical with respect to both Funds with the minor differences outlined below.
The only material difference in a stated policy is that the Stock Fund will
normally maintain at least 65% of its assets in common and preferred stocks, and
thus, no more than 35% of its assets in debt securities and other instruments.
While the Variable Annuity Fund has no comparable policy and therefore more
flexibility in theory, the portfolio managers in fact have invested both funds
in a very similar manner over the years.
What are the Funds' investment objectives?
The investment objective of both the Stock Fund and the Variable Annuity Fund is
to seek long-term growth of capital. The investment objective is a fundamental
policy and may not be changed without the approval of a majority of the
outstanding shares. The Funds have the right to purchase securities in the U.S.
and any foreign country, developed or developing. Although the Funds are
authorized to invest in both equity and debt securities, income is not part of
their investment objective and any income earned from investments in debt
securities is incidental. The Stock Fund seeks to achieve its objective of
long-term capital growth through a policy of investing under normal market
conditions at least 65% of its assets in common stocks issued by companies,
large and small, in various nations throughout the world. While the Variable
Annuity Fund has no specific policies concerning the percentage of assets
invested in each asset class, it generally invests in common stocks.
What are the Funds' investment policies?
In seeking to achieve their investment objectives, the Stock Fund and the
Variable Annuity Fund are guided by substantially similar policies and
restrictions. Unless otherwise specified, the investment policies of the Funds
are not fundamental and may be changed without shareholder approval.
Both the Stock Fund and the Variable Annuity Fund invest a substantial
percentage of their assets in equity securities of foreign issuers. Such
securities may include common stock and preferred stock. The Funds are
additionally authorized to invest in securities (bonds or preferred stock) which
are convertible into common stock. With respect to foreign equity investments,
the Funds may also invest in securities representing underlying international
securities such as American Depository Receipts (ADRs), European Depository
Receipts (EDRs) and Global Depository Receipts (GDRs). These depository receipts
may be purchased by both Funds, whether they are sponsored or unsponsored.
Both the Stock Fund and the Variable Annuity Fund may invest in debt securities.
While the Stock Fund must limit its investment in debt securities to 35% of its
assets, the Variable Annuity Fund may invest in such securities without
limitation, consistent with its investment objective. Neither of the Funds in
fact have invested significantly in debt securities. When each Fund invests in
debt securities, it is with a view toward growth of capital as opposed to the
interest income that may be generated by such investments. For example, the
Funds may seek capital growth by purchasing convertible bonds, bonds that are
presently selling at a discount or, if TICI believes that the issuer may resume
interest payments in the near future, debt securities which have defaulted.
The Stock Fund and the Variable Annuity Fund are authorized to invest in
securities which are rated at least Caa by Moody's Investors Services, Inc.
("Moody's") or CCC by Standard and Poor's Corporation ("S&P"), or if not rated,
are of equivalent quality as determined by TICI. However, as an operating policy
(which is not fundamental and can be changed without a shareholder vote), the
Funds will not invest more than 5% of their assets in debt securities rated
lower than Baa by Moody's or BBB by S&P.
The Funds are also authorized to invest their assets in cash and cash equivalent
securities under certain circumstances. For temporary defensive purposes, when
TICI believes that market conditions merit, both the Stock Fund and the Variable
Annuity Fund may invest without limit in U.S. government securities, bank time
deposits in the currency of any major nation, commercial paper and certain
repurchase agreements. Any commercial paper purchased by the Funds must be rated
A-1 by S&P or Prime-1 by Moody's or, if not rated, be issued by a company which
at the date of investment has an outstanding debt issue rated AAA or AA by S&P
or Aaa or Aa by Moody's. With respect to repurchase agreements, the Funds may
purchase U.S. government securities from banks or broker-dealers, with a
simultaneous agreement by the seller to repurchase them at a specified time
(generally within no more than seven days) at the original price plus accrued
interest.
In addition to the types of securities investments listed above, both the Stock
Fund and the Variable Annuity Fund, for hedging purposes only, may invest in
securities involving stock index futures contracts. During or in anticipation of
a period of market appreciation, the Funds may purchase stock index futures for
the purpose of reducing the effective purchase price; furthermore, during or in
anticipation of a period of market decline, the Funds may sell stock index
futures for the purpose of limiting the exposure to such decline.
Finally, the Funds are authorized to loan their portfolio securities and to
invest in restricted or illiquid securities. In addition, the Stock Fund is
authorized to purchase securities and debt obligations on a "when-issued" or
"delayed delivery" basis, and to borrow money for investment purposes. Please
see the Stock Fund prospectus, attached hereto, for further information about
these investments and transactions.
What are the Funds' investment restrictions?
The Funds have adopted certain investment restrictions governing their
activities. Unless otherwise noted, these restrictions are a matter of
fundamental policy and cannot be changed without shareholder approval. Many of
the restrictions are the same for both Funds, although there are minor
differences as described below.
The Funds are limited in the extent to which they may purchase the securities of
any single issuer. With respect to 75% of their total assets, neither Fund may
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 any one
company, including more than 10% of their outstanding voting securities (except
for investments in obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities). The Funds may not invest more than 15% of
their 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
their total assets (10% in the case of the Variable Annuity Fund) 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. Furthermore, the Funds may not invest more than 5%
of their assets in debt securities rated lower than Baa by Moody's or BBB by
S&P.
The restrictions of the Stock Fund and the Variable Annuity Fund also prevent
the Funds from concentrating their investments in any single industry. Neither
Fund may invest more than 25% of its total assets in any single industry.
The Funds are restricted from investing in real estate or mortgages on real
estate and from purchasing or selling commodity contracts, except that they may
purchase or sell stock index futures contracts. With respect to the Variable
Annuity Fund, this limitation explicitly does not apply to marketable securities
secured by real estate or interests therein or issued by companies or investment
trusts which invest in real estate or interests therein.
The Funds are restricted from acting as underwriters or from issuing senior
securities.
Neither the Stock Fund nor the Variable Annuity Fund may loan money, except to
the extent that investments in certain fixed-income instruments may be
interpreted to be loans to the issuer.
Neither Fund may 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 30% for the Stock Fund and 5% for the Variable
Annuity Fund, of the value of its total net assets.
What are the Funds' risk factors?
The risk factors for the Stock Fund and the Variable Annuity Fund are
essentially the same, because the Funds are managed in essentially the same way.
The following is a summary of the investment risks of each Fund; for more
details, please see the enclosed Stock Fund prospectus under "Risk Factors."
General Risks. Investors in the Funds are cautioned that all investments involve
risk and there can be no guarantee against loss resulting from an investment in
the Funds; nor can there be any assurance that the Funds' investment objective
will be obtained. As with any investment in securities, the value of, and income
from, an investment in the Funds can decrease as well as increase, depending on
a variety of factors which may affect the values and income generated by the
Funds' 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
Funds 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 Funds are
invested in equity securities may also be reflected in declines of the price of
shares of the Funds. Changes in currency valuations will affect the price of the
shares of the Funds. 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 be correct. The
Funds are not intended as a complete investment program.
Foreign Investment Risks. The Funds are 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, including but not limited to political, social
or economic instability in the country of the issuer, and less liquid and more
volatile securities trading markets. In addition, foreign investments may be
affected by economic developments, possible withholding taxes, seizure of
foreign deposits, changes in currency rates or currency exchange controls,
higher custodial costs, higher transactional costs due to a lack of negotiated
commissions, or other governmental restrictions which might affect the amount
and types of foreign investments made or the payment of principal or interest on
securities in the investment portfolios of the Funds. Furthermore, in many
countries there is less publicly available information about issuers than is
available in reports about companies in the United States and it may be more
difficult to obtain or enforce a court judgment in the event of a lawsuit. 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.
Small Company Risks. The Funds may invest in companies with relatively small
revenues and limited product lines. Smaller capitalization companies may lack
depth of management, they may be unable to internally generate the money
necessary for growth or potential development or to generate such money through
external financing on favorable terms. Due to these and other factors, smaller
companies may suffer significant losses.
Junk Bond Risks. Both Funds may invest, to a limited extent, in high-risk, lower
quality debt securities, commonly referred to as "junk bonds." These securities
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.
INFORMATION ABOUT THE FUNDS
Information about the Stock Fund is included in its current prospectus, which is
attached to this Prospectus/Proxy Statement as Exhibit B and incorporated by
reference herein. Additional information about the Stock Fund is included in a
Statement of Additional Information, dated May 1, 1997, which has been filed
with the Securities and Exchange Commission and is incorporated by reference
herein. A copy of the Statement of Additional Information may be obtained
without charge by writing to the Stock Fund, or by calling 1-800/774-5001.
Information about the Variable Annuity Fund is incorporated herein by reference
from the Variable Annuity Fund's current prospectus dated May 1, 1997, and the
Variable Annuity Fund's Statement of Additional Information of the same date, a
copy of which may be obtained without charge by writing or calling the Variable
Annuity Fund at the address and telephone number shown on the cover page of this
Prospectus/Proxy Statement.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act,
as applicable, and, in accordance with such requirements, file proxy materials,
reports and other information with the Securities and Exchange Commission.
Reports and other information filed by the Funds can be inspected and copied at
the Public Reference Facilities maintained by the Securities and Exchange
Commission at 450 Fifth Street NW, Washington, DC 20549, and at the Southeast
Regional Office of Securities and Exchange Commission at 1401 Brickell Avenue,
Suite 200, Miami, Florida 33131. Copies of such material can be obtained from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, DC 20549, at
prescribed rates.
REASONS FOR THE MERGER PLAN
What factors did the VAF Board consider prior to recommending approval of the
Merger Plan?
TFAC management recommended the Merger Plan to the VAF Board for two main
reasons:
1) The Variable Annuity Fund is a relatively small fund, with just over $17.5
million in assets as of September 30, 1997. The Fund will almost certainly get
even smaller, because TFAC is no longer selling the immediate variable annuity
Contracts and the Variable Annuity Fund's assets shrink with every annuity
payment made to Contract Owners. In general, shrinking assets are not considered
good for a fund's investment performance, because the portfolio managers may
have less flexibility to make investments and the fund's operating expenses may
consume a larger percentage of the remaining assets.
2) The Stock Fund is very similar to the Variable Annuity Fund, but much larger
with over $834 million in assets as of September 30, 1997. The Stock Fund has
the same portfolio managers and investment objectives as the Variable Annuity
Fund, and very similar investment policies and strategies. Moreover, the Stock
Fund is available in variable insurance contracts that are actively being sold,
so it is less likely to have shrinking assets.
The Merger Plan was presented to the VAF Board at a meeting held on October 18,
1997. In determining whether to recommend approval of the Merger Plan to
shareholders, the VAF Board considered, among other factors: that TFAC has
advised the VAF Board of the likelihood that the Variable Annuity Fund will face
a state of net redemptions; the compatibility of the investment objectives,
policies, restrictions and portfolios of the Variable Annuity Fund with the
Stock Fund; the comparable expense ratios of the Stock Fund Class 1 and the
Variable Annuity Fund; the comparative investment performance of the Stock Fund
and the Variable Annuity Fund; the tax consequences of the Merger Plan; the
significant experience TICI and its Templeton affiliates have, as managers of
over $103 billion in assets in international and global portfolios (as of
September 30, 1997); that no dilution would result from the Merger Plan; and,
based on representations made by TFAC, that there would be no impact on the
Contract rights of the Contract Owners.
After considering these and other factors, the VAF Board (1) determined that the
Merger Plan is in the best interests of TFAC and, based on TFAC's
representations, is in the best interests of Contract Owners and (2) approved
the Merger Plan subject to shareholder approval. The Variable Annuity Fund is
only used as the funding option for two immediate variable annuities and no new
Contracts are being sold. As annuity payments are made to Contract Owners, the
assets of the Fund will continue to decrease. Therefore, the VAF Board concluded
that the long-term net redemptions faced by the Variable Annuity Fund would
likely hurt the shareholders and indirectly, Contract Owners because of reduced
investment opportunities and higher expenses as a percentage of net assets in
the future. The VAF Board agreed with TFAC management that a merger between the
Variable Annuity Fund and a larger dedicated insurance products fund having
similar investment objectives and policies would address these problems. A
larger fund should have enhanced ability to effect portfolio transactions on
more favorable terms and should have greater investment flexibility. Higher
aggregate net assets and the opportunity for net cash inflows may also reduce
the risk that the total expense ratio of the Variable Annuity Fund will rise
significantly as certain fixed expenses become a larger percentage of the
shrinking net assets of the Fund.
The VAF Board then considered that the Stock Fund is a much larger insurance
products fund, is managed by the same adviser and the same individual portfolio
managers, has very similar investment objectives, policies and risk
considerations, and has comparable historical performance. Moreover, the VAF
Board concluded no dilution would result from the proposed Merger Plan because
TFAC will receive Stock Fund Class 1 shares equal in value to the shares of the
Variable Annuity Fund.
The VAF Board did note that the Stock Fund pays TICI a higher management fee, as
a percentage of fund assets, than the Variable Annuity Fund. It determined,
however, that the Stock Fund's higher management fee would not adversely affect
Variable Annuity Fund Contract Owners, for several reasons. First, the Stock
Fund's management fee increase was recently reviewed and approved by the TVPSF
Board and by shareholders in a proxy vote in 1997. Before recommending this
increase, the Independent Trustees of TVPSF had considered TICI's reputation,
experience and past performance in global investing, and that the Stock Fund's
previous advisory fees were lower than those paid by comparable TICI-managed
funds. The TVPSF Independent Trustees also took into account the fact that, as
noted in the recent TVPSF proxy statement, the Stock Fund's total expense ratio,
including the increased investment management fee, ranked in the second lowest
quintile - or below the median - for its comparison group as selected by Lipper
Analytical Services, Inc. Second, based on the pro forma figures, the proposed
merger would not materially change the current overall operating expense ratio
borne indirectly by Variable Annuity Fund Contract Owners, because the other
operating expenses of the Variable Annuity Fund are much higher than those of
the Stock Fund. (See "What are the Funds' Expenses?" above). Finally, and most
importantly, since the Variable Annuity Fund faces long-term net redemptions,
without a merger, its expense ratio is likely to increase, thus widening the gap
between the two Funds' expense ratios. The VAF Board also considered that,
according to Dechert Price & Rhoads, counsel to the Fund, it is not expected
that the Variable Annuity Fund shareholders will recognize any gain or loss for
federal income tax purposes as a result of the Merger plan.
Based on the factors and information described above, the VAF Board concluded
that the Merger Plan is likely to benefit shareholders and, based on
representations from TFAC, likely to benefit Contract Owners and approved the
Merger plan, subject to shareholder approval, effective April 30, 1998. These
factors represent the VAF Board's business judgment and there can be no
guarantee that any of the potential benefits of this proposal will in fact be
realized. Specifically, the Stock Fund may not experience lower expense ratios
than the Variable Annuity Fund. Contract Owners may still have a gain or loss,
or their annuity payments may rise or fall, based on the performance of the
Stock Fund. Nonetheless, in approving the proposal, the VAF Board determined, in
the exercise of its business judgment and in light of the fiduciary duties under
relevant state law and the 1940 Act that, based upon the factors considered by
it, the proposal is reasonably likely to benefit the Variable Annuity Fund and
its shareholders and Contract Owners. If the Merger Plan is not approved, the
VAF Board will consider what, if any, other possible courses of action it may
take with respect to the Variable Annuity Fund.
The TVPSF Board has also determined that the Merger Plan was in the best
interests of Stock Fund shareholders and that no dilution would result to such
shareholders.
THE VAF BOARD RECOMMENDS THAT YOU
VOTE FOR THE MERGER PLAN.
INFORMATION ABOUT THE MERGER PLAN
The following summary of the Merger Plan is a summary only. This summary is
qualified in its entirety by reference to the formal Agreement and Plan of
Reorganization, which is attached as Exhibit A.
How will the Merger Plan be carried out?
If the Merger Plan is approved, the reorganization will be completed promptly
after each party has satisfied its obligations. (See "What are the conditions
precedent to closing?" below). The Merger Plan will be completed on April 30,
1998 (the Closing Date), or such other date as is agreed to by TVPSF, on behalf
of the Stock Fund, and the Variable Annuity Fund, provided that the Merger Plan
may be ended by either party if the Closing Date does not occur on or before
June 30, 1998 (Closing Date plus 60 days).
On the Closing Date, the Variable Annuity Fund will deliver to the Stock Fund
substantially all of its assets and recorded liabilities in exchange for Stock
Fund Class 1 shares having an aggregate net asset value equal to the aggregate
value of assets delivered as of 4:00 p.m. Eastern time on the Closing Date. The
cash and securities held in the Variable Annuity Fund portfolio will become part
of the Stock Fund portfolio, subject to the investment policies and
diversification requirements of the Stock Fund. The stock transfer books of the
Variable Annuity Fund, will be permanently closed as of 4:00 p.m. Eastern time
on the Closing Date and only requests for redemption of shares of the Variable
Annuity Fund received in proper form prior to 4:00 p.m. on the Closing Date will
be accepted by the Variable Annuity Fund. Redemption requests for shares of the
Variable Annuity Fund received after that time will be considered to be
redemption requests for shares of the Stock Fund Class 1.
Upon completion of the Merger Plan, the Variable Annuity Fund will receive Stock
Fund Class 1 shares. The number of shares shall be based on the dollar value of
the assets delivered to the Stock Fund. These Stock Fund Class 1 shares will
then be delivered to TFAC, as former sole shareholder of the Variable Annuity
Fund.
If the Merger Plan is not approved, the assets of the Variable Annuity Fund will
not be delivered on the Closing Date and the obligations of the Variable Annuity
Fund under the Merger Plan will not be effective.
What are the conditions precedent to closing?
The obligation of the Variable Annuity Fund to deliver its assets to the Stock
Fund under the Merger Plan is subject to the satisfaction of certain conditions
precedent, including performance by the Stock Fund, in all material respects, of
its agreements and undertakings under the Merger Plan, the receipt of certain
documents from the Stock Fund, the receipt of an opinion of counsel to the Stock
Fund, and requisite approval of the Merger Plan by the shareholders of the
Variable Annuity Fund, as described above. The obligations of the Stock Fund to
complete the Merger Plan is subject to the satisfaction of certain conditions
precedent, including the performance by the Variable Annuity Fund of its
agreements and undertakings under the Merger Plan, the receipt of certain
documents and financial statements from the Variable Annuity Fund, and the
receipt of an opinion of counsel to the Variable Annuity Fund.
Who will pay the expenses of the Merger Plan?
The Variable Annuity Fund and the Stock Fund shall each bear their own expenses
in connection with the Merger Plan.
What are the tax considerations?
In the opinion of Dechert Price and Rhoads, counsel to the Variable Annuity
Fund, based on certain assumptions and representations received from the
Variable Annuity Fund and TVPSF, it is not expected that shareholders of the
Variable Annuity Fund will recognize any gain or loss for federal income tax
purposes as a result of the exchange of their shares of the Variable Annuity
Fund for shares of the Stock Fund Class 1 or that TVPSF will recognize any gain
or loss upon receipt of the Variable Annuity Fund assets.
Contract Owners of the Variable Annuity Fund should consult their tax advisors
regarding the effect, if any, of the Merger Plan in light of their individual
circumstances. Since the foregoing discussion only relates to the federal income
tax consequences of the Merger Plan, Contract Owners of the Variable Annuity
Fund should also consult their tax advisors as to state and local tax
consequences, if any, of the Merger Plan.
What rights do Stock Fund Class 1 shareholders have?
Class 1 shares of the Stock Fund will be issued to the separate accounts of
TFAC, the shareholders of the Variable Annuity Fund, as described in the Merger
Plan. Each share will be fully paid and nonassessable when issued, will have no
preemptive or conversion rights, and will be transferable upon the books of the
Stock Fund. In accordance with the Stock Fund's normal procedures as specified
in its prospectus, the Stock Fund will not generally issue certificates for
shares of its capital stock. Ownership of the Stock Fund Class 1 shares by TFAC
will be recorded electronically and the Stock Fund will issue a confirmation to
TFAC relating to those shares acquired as a result of the Merger Plan.
As a shareholder of the Stock Fund, TFAC will have substantially similar voting
rights and rights upon dissolution with respect to the Stock Fund as it
currently has with respect to the Variable Annuity Fund. Each share outstanding
of both the Variable Annuity Fund and the Stock Fund entitles the holder to one
vote. TFAC and other insurance companies' separate accounts, as shareholders of
the funds, are entitled to vote the shares of the funds at any regular and
special meeting of the shareholders. However, the insurance companies will
generally vote their shares in accordance with instructions received from owners
of the variable contracts. The shares of both the Stock Fund and the Variable
Annuity Fund have non-cumulative voting rights, which means that, in all
elections of trustees, the holders of more than 50% of the shares voting can
elect 100% of the trustees, if they choose to do so and in such event, the
holders of the remaining shares voting will not be able to elect any person or
persons to the Board of Trustees.
The TVPSF serves as an investment vehicle for both variable annuity and variable
life insurance contracts, and is sold to a number of unaffiliated insurance
companies. The TVPSF Board 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, and
will determine what action, if any, should be taken in the event of such
conflict. Although TVPSF 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.
It is the position of the Division of Investment Management of the U.S.
Securities and Exchange Commission that TFAC will not be entitled to any
"dissenters' rights" since the proposed Merger Plan involves two open-end
investment companies registered under the 1940 Act. Although no dissenters'
rights may be available, there will be no material differences between TFAC's
redemption rights in the Stock Fund and its current redemption rights in the
Variable Annuity Fund. The rights of Contract Owners in their variable annuity
Contracts will not be changed as a result of the Merger Plan.
Like the Variable Annuity Fund, TVPSF does not routinely hold annual meetings of
shareholders. TVPSF is a multi-
series investment company which currently issues shares representing interests
in nine separately managed funds. Each series of TVPSF (including the Stock
Fund) offers two classes of shares, Class 1 and Class 2 (except the Money Market
Fund which offers only Class 1). Class 1 of the Stock Fund is the class to be
provided under the Merger Plan. Each class of each fund in TVPSF 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. Shareholders of each series of each fund currently
vote in the aggregate with the shareholders of the Fund's other series on
certain matters (for example, the election of trustees and the ratification of
independent accountants). For matters that only affect a certain series of a
Fund, or a certain class of a series, only the shareholders of that series or
class are entitled to vote.
How will the Merger Plan change the Funds' statements of capital?
The following table sets forth as of June 30, 1997 (i) the capitalization of the
Variable Annuity Fund, (ii) the capitalization of the Stock Fund, (iii) the
capitalization of the Stock Fund Class 1; and (iv) the pro forma capitalization
of the Stock Fund and (v) Stock Fund Class 1 as adjusted to give effect to the
proposed Merger Plan. The actual capitalization of the Stock Fund and Stock Fund
Class 1 are likely to change in the future because of investment results and
purchases and sales of shares.
<TABLE>
<CAPTION>
Stock Fund
Variable Stock Fund Class 1
Annuity Stock Fund Pro Forma Pro Forma
Fund Stock Fund Class 1 afterMerger after Merger
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets $16,820,347 $771,082,532 $767,571,347 $787,902,879 $784,391,694
Net asset value per share $20.20 $23.78 $23.78 $23.69 $23.69
Shares outstanding 832,692 32,420,964 32,273,292 33,253,656 33,105,984
</TABLE>
To the extent permitted by law, the Merger Plan may be amended without
shareholder approval by mutual agreement in writing by the Variable Annuity Fund
and TVPSF. The Merger Plan may be terminated and abandoned at any time before
or, to the extent permitted by law, after the approval of the shareholders of
the Variable Annuity Fund by mutual consent of the parties to the Merger Plan.
VOTING INFORMATION AND PRINCIPAL STOCKHOLDERS
In the event that a quorum is present at the Meeting but sufficient votes to
approve the proposal set forth in the Notice of Special Meeting of Shareholders
are not received by the date of the Meeting, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further solicitations
of proxies. Any such adjournment will require the affirmative vote of a majority
of those shares entitled to vote present at the Meeting in person or by proxy.
TFAC will vote in favor of such adjournment those shares which they are entitled
to vote in favor of the proposal and against such adjournment those shares
required to be voted against the proposals. The costs of any such additional
solicitation and of any adjourned session will be borne by TICI.
The following table shows the number of shares outstanding of each Fund as of
September 30, 1997:
<TABLE>
<CAPTION>
Number of
Shares
Fund Name Outstanding
- ------------------------------------------------------------------------------------
Stock Fund
<S> <C>
Class 1 32,275,554.858
All Classes 32,711,817.319
Variable Annuity Fund 807,149.033
</TABLE>
As of September 30, 1997, the following insurance companies owned, on behalf of
certain separate accounts, more than 5% of the Funds' outstanding shares:
<TABLE>
<CAPTION>
Percent of
Outstanding
Fund Name Insurance Company Name and Address Number of Shares Shares
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Fund - Class 1 Phoenix Home Life Mutual Insurance Company 14,652,112.100 45.397%
100 Bright Meadows Blvd.
Enfield, CT 06082
The Travelers Insurance Company 17,604,718.029 54.545%
One Tower Square
Hartford, CT 06183
Stock Fund - All Classes Phoenix Home Life Mutual Insurance Company 15,057,633.203
46.031%
The Travelers Insurance Company 17,604,718.029 53.818%
Variable Annuity Fund Templeton Funds Annuity Company ("TFAC") 807,149.033 100%
100 Fountain Pkwy
St. Petersburg FL 33716-1205
</TABLE>
However, TFAC, on behalf of the separate accounts, will exercise voting rights
attributable to the Variable Annuity Fund shares with respect to the Merger Plan
proposal and any other business that may properly come before the Meeting, in
accordance with voting instructions received from Contract Owners. To this
extent, TFAC does not exercise control over the Funds by virtue of the voting
rights arising from their record ownership of Fund shares.
THE FUNDS' SERVICE PROVIDERS
Who is the investment manager?
TICI is the investment manager of both the Variable Annuity Fund and the Stock
Fund. TICI is an indirect, wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company, the principal shareholders of
which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately
20% and 16%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry.
Under an Investment Management Agreement with each Fund, TICI is paid a monthly
fee equal on an annual basis as stated below:
<TABLE>
<CAPTION>
% On An Annual Basis
Average Daily Net Assets Stock Fund Variable Annuity Fund
- ------------------------------------------------------------------------------------
<S> <C> <C>
up to $200,000,000 0.75% 0.50%
$200,000,000-$1,300,000,000 0.675% 0.45%
over $1,300,000,000 0.60% 0.40%
</TABLE>
The individual portfolio managers are identical for both the Variable Annuity
Fund and the Stock Fund. The lead portfolio manager is Mark Beveridge. Mr.
Beveridge, Vice President of TICI, joined the Templeton organization in 1985.
William T. Howard Jr., Vice President of TICI and Howard J. Leonard, Senior Vice
President of TICI, exercise secondary portfolio management responsibilities. For
more details, please see the Stock Fund prospectus attached hereto as Exhibit B.
Who are the business manager and transfer agent?
Under Business Management Agreements with TVPSF, on behalf of the Stock Fund,
and the Variable Annuity Fund, TFAC provides certain administrative facilities
and services for the Stock Fund and the Variable Annuity Fund, including, but
not limited to, payment of salaries of officers, the preparation and maintenance
of books and records, preparation of tax returns and financial reports and
monitoring compliance with regulatory requirements. TFAC's duties also include
acting as the transfer agent and dividend disbursing agent for the Funds. The
main office of TFAC, is 100 Fountain Pkwy, St. Petersburg, Florida 33716-1205.
TFAC is a wholly-owned subsidiary of Resources. TFAC receives fees from the
Funds for the business management services described above.
The Funds also pay TFAC a portion of the monthly fee for the business management
services described above.
<TABLE>
<CAPTION>
% On An Annual Basis
Average Daily Net Assets TVPSF* Variable Annuity Fund
- ------------------------------------------------------------------------------------
<S> <C> <C>
up to $200,000,000 0.15% 0.15%
over $200,000,000 0.135% 0.135%
over $700,000,000 0.10% 0.10%
over $1,200,000,000 0.075% 0.075%
</TABLE>
*The fee is based on the combined daily net assets of all series of TVPSF and is
allocated between each series of TVPSF according to their respective net assets.
Each class of each series (including Stock Fund Class 1) bears a portion of the
fee, determined by the proportion of the TVPSF that it represents.
Who is the distributor?
Franklin Templeton Distributors, Inc. ("FTDI"), serves as the Stock Fund's
principal underwriter. FTDI receives no compensation for these services.
Who is the custodian?
The Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New York, New York
10081, serves as custodian of both the Stock Fund and the Variable Annuity
Fund's assets.
EXHIBITS TO COMBINED PROXY STATEMENT AND PROSPECTUS
Exhibit
A Agreement and Plan of Reorganization between the Templeton Variable Annuity
Fund and the TVPSF (attached).
B Prospectus dated May 1, 1997, amended December 1, 1997, of the Templeton Stock
Fund - Class 1 of the TVPSF (attached).
C Annual Report Dated December 31, 1997 of the Templeton Stock Fund - Class 1 of
the TVPSF (enclosed).
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this
1st day of November,1997, by and between Templeton Variable Products Series Fund
(the "Trust"), a Massachusetts Business Trust with its principal place of
business at Broward Financial Centre, Suite 2100, Ft. Lauderdale, Florida 33394
on behalf of its Templeton Stock Fund (the "Acquiring Fund") and Templeton
Variable Annuity Fund (the "Acquired Fund"), a Massachusetts Business Trust with
its principal place of business at Broward Financial Centre, Suite 2100, Ft.
Lauderdale, Florida 33394.
This Agreement is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a) of the United States Internal
Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all or substantially all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for
Class I shares of beneficial interest, ($0.01 par value per share), of the
Acquiring Fund (the "Acquiring Fund Shares"), the assumption by the Acquiring
Fund of certain identified liabilities of the Acquired Fund, and the
distribution of the Acquiring Fund Shares to the shareholders of the Acquired
Fund in complete liquidation of the Acquired Fund as provided herein, all upon
the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund and the Trust, are both open-end, registered
investment companies of the management type and the Acquired Fund owns
securities which generally are assets of the character in which the Acquiring
Fund is permitted to invest;
WHEREAS, the Board of Trustees of the Trust has determined that the exchange of
all or substantially all of the assets of the Acquired Fund for Acquiring Fund
Shares and the assumption of certain identified liabilities of the Acquired Fund
by the Acquiring Fund is in the best interest of the Acquiring Fund and its
Shareholders and that the interest of the existing shareholders of the Acquiring
Fund would not be diluted as a result of this transaction;
WHEREAS, the Board of Trustees of the Acquired Fund has determined that the
exchange of all or substantially all of the assets of the Acquired Fund for
Acquiring Fund Shares and the assumption of certain identified liabilities of
the Acquired Fund by the Acquiring Fund is in the best interest of the Acquired
Fund and its shareholders and that the interests of the existing shareholders of
the Acquired Fund would not be diluted as a result of this transaction;
WHEREAS, the purpose of the Reorganization is to combine the assets of the
Acquiring Fund with those of the Acquired Fund in an attempt to achieve greater
operating economies in light of long term net redemptions and increased
portfolio diversification for the Acquired Fund;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES, THE ASSUMPTION OF CERTAIN IDENTIFIED ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
Subject to the terms and conditions herein set forth and on the basis of the
representatives and warranties contained herein, the Acquired Fund agrees to
transfer all of the Acquired Fund's assets as set forth in paragraph 1.2 to the
Acquiring Fund and the Acquiring Fund agrees in exchange therefor (i) to deliver
to the Acquired Fund the number of Acquiring Fund Shares, including fractional
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets computed in the manner and as of the time and date set forth in
paragraph 2.1 by the net asset value of one Acquiring Fund Share computed in the
manner and as of the time and date set forth in paragraph 2.2; and (ii) to
assume certain identified liabilities of the Acquired Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3.1 (the "Closing").
The assets of the Acquired Fund to be acquired by the Acquiring Fund shall
consist of all property, including without limitation, all cash, securities,
commodities and futures interests and dividends or interest receivable which are
owned by the Acquired Fund and any deferred or prepaid expenses shown as an
asset on the books of the Acquired Fund on the closing date provided in
paragraph 3.1 (the "Closing Date").
The Acquired Fund will endeavor to discharge all of its known liabilities and
obligations prior to the Closing Date. The Acquiring Fund shall assume all
liabilities, expenses, costs, charges and reserves (expected to include expenses
incurred in the ordinary course of the Acquired Fund's operations, such as
accounts payable relating to custodian and transfer agency fees, legal and audit
fees, and expenses of state securities registration of the Acquired Fund's
shares) reflected on an unaudited statement of assets and liabilities of the
Acquired Fund prepared by Templeton Funds Annuity Company, the business manager
of the Acquired Fund and the Acquiring Fund, as of the Valuation Date (as
defined in paragraph 2.1) in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Acquired Fund reflected on that
unaudited statement of assets and liabilities and shall not assume any other
liabilities.
Immediately after the transfer of assets provided for in paragraph 1.1, the
Acquired Fund will distribute pro rata to the Acquired Fund's shareholders of
record, determined as of immediately after the close of business on the Closing
Date (the "Acquired Fund Shareholders"), the Acquiring Fund Shares received by
the Acquired Fund pursuant to paragraph 1.1 and will completely liquidate. Such
distribution and liquidation will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the Acquired Fund on the
books of the Acquiring Fund to open accounts on the share records of the
Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net
asset value of Acquiring Fund Shares to be so credited to Acquired Fund
Shareholders shall be equal to the aggregate net asset value of the Acquired
Fund shares owned by such shareholders as of immediately outstanding shares of
the Acquired Fund will simultaneously be canceled on the books of the Acquired
Fund, although share certificates representing interests in the Acquired Fund
will represent a number of Acquiring Fund Shares after the Closing Date as
determined in accordance with paragraph 2.3. The Acquiring Fund will not issue
certificates representing the Acquiring Fund Shares in connection with such
exchange except upon request by a shareholder of the Acquired Fund.
Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring
Fund. Shares of the Acquiring Fund will be issued in the manner described in the
Acquiring Fund's then-current prospectus and statement of additional
information.
Any reporting responsibility of the Acquired Fund including (but not limited to)
the responsibility for any periods ending on or before the Closing Date for
filing of regulatory reports, tax returns, or other documents with the
Securities and Exchange Commission, any state securities or any other relevant
regulatory authority, is and shall remain the responsibility of the Acquired
Fund.
VALUATION
The value of the Acquired Fund's assets to be acquired by the Acquiring Fund
hereunder shall be the value of such assets computed as of the normal close of
business of the New York Stock Exchange on the Closing Date (such time and date
being hereinafter called the "Valuation Date"), using the valuation procedures
set forth in the Trust's Declaration of Trust and then-current prospectus or
statement of additional information.
The net asset value of an Acquiring Fund Share shall be the net asset value per
share computed as of immediately after the close of business of the New York
Stock Exchange on the Valuation Date, using the valuation procedures set forth
in the Trust's Declaration of Trust and then-current prospectus or statement of
additional information.
The number of the Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Fund's assets shall be determined
by dividing the value of the net assets of the Acquired Fund determined using
the same valuation procedures referred to in paragraph 2.1 by the net asset
value of an Acquiring Fund Share determined in accordance with paragraph 2.2.
All computations of value with respect to the Acquiring Fund shall be made by
Templeton Funds Annuity Company.
CLOSING AND CLOSING DATE
The Closing Date Shall be April 30, 1998 or such later date as the parties may
agree in writing. All acts taking place at the Closing shall be deemed to take
place simultaneously as of immediately after the close of business on the
Closing Date unless otherwise agreed to by the parties. The close of business on
the Closing Date shall be as of 4:00 p.m. New York time. The Closing shall be
held at the offices of the Trust, Ft. Lauderdale, Florida or at such other place
and time as the parties shall mutually agree.
The Chase Manhattan Bank, N.A., as custodian for the Acquiring Fund (the
"Custodian"), shall deliver at the Closing a certificate of an authorized
officer stating that: (a) the Acquiring Fund's portfolio securities, cash, and
any other assets shall have been delivered in proper form to the Acquired Fund;
and (b) all necessary taxes including without limitation all applicable federal
and state stock transfer stamps, if any, shall have been paid, or provision for
payment shall have been made, in conjunction with the delivery of portfolio
securities.
Templeton Funds Annuity Company (the "Transfer Agent") on behalf of the Acquired
Fund shall deliver at the Closing a certificate of an authorized officer stating
that its records contain the names and addresses of the Acquired Fund
Shareholders and the number and percentage ownership of outstanding shares owned
by each such shareholder immediately prior to the Closing. The Acquiring Fund
Shares to be credited on the Closing Date to the Acquired Fund or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request.
REPRESENTATIONS AND WARRANTIES
The Acquired Fund represents and warrants to the Trust that for each taxable
year of operation since inception (including the taxable year ending on the
Closing Date) the Acquired Fund has met the requirements of Subchapter M of the
Code for qualification as a regulated investment company and has elected to be
treated as such and has met the diversification requirements under Section
817(h) of the Code and the rules thereunder.
The Trust on behalf of the Acquiring Fund represents and warrants to the
Acquired Fund that for each taxable year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such and has met
the diversification requirements under Section 817(h) of the Code and the rules
thereunder.
CONVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
The Acquiring Fund and the Acquired Fund each will operate its business in the
ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions, and any other
distributions that may be advisable.
The Acquired Fund will call a meeting of the Acquired Fund Shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
If any of the conditions set forth below do not exist on or before the Closing
Date with respect to the Acquired Fund or the Acquiring Fund, the other party to
this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
The Agreement and the transactions contemplated herein shall have been approved
by the requisite vote of the holders of the outstanding shares of the Acquired
Fund in accordance with the provisions of the Acquired Fund's Declaration of
Trust and Bylaws and certified copies of the resolutions evidencing such
approval shall have been delivered to the Acquiring Fund;
On the Closing Date, no action, suit or other proceeding shall be threatened or
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein;
All consents of other parties and all other consents, orders and permits of
Federal, state, and local regulatory authorities deemed necessary by the
Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
The Acquiring Fund's registration statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act; and
The Acquired Fund shall have received on the Closing Date the opinion of Dechert
Price & Rhoads in a form reasonably satisfactory to the Acquired Fund, and dated
as of the Closing Date, to the effect that: (a) the Trust has been duly formed
and is validly existing and in good standing under the laws of the Commonwealth
of Massachusetts; and (b) the Agreement has been duly authorized, executed and
delivered by the Trust on behalf of the Acquiring Fund and constitutes a valid
and legally binding obligation of the Trust enforceable against the Trust in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
The Trust shall have received on the Closing Date the opinion of Dechert Price &
Rhoads in a form reasonably satisfactory to the Trust, dated as of the Closing
Date, to the effect that: (a) The Acquired Fund has been duly formed and is in
good standing under the laws of the Commonwealth of Massachusetts; (b) the
Agreement has been duly authorized, executed and delivered by the Acquired Fund
and constitutes a valid and legally binding obligation of the Acquired Fund; and
(c) the Agreement is enforceable against the Acquired Fund in accordance with
its terms, subject to bankruptcy, insolvent, fraudulent transfer,
reorganization, moratorium and laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
The parties shall have received the opinion of Dechert Price & Rhoads addressed
to the Trust and the Acquired Fund substantially to the effect that the
transactions contemplated by this Agreement will be treated for Federal income
tax purposes as reorganizations within the meaning of Section 368(a) of the
Code. Notwithstanding anything herein to the contrary, neither the Trust nor the
Acquired Fund may waive the condition set forth in this paragraph 6.7.
BROKERAGE FEES AND EXPENSES
The Acquiring Fund and the Acquired Fund each represents and warrants to the
other that it has no obligations to pay any brokers or finders fees in
connection with the transactions provided for herein.
Each party to this Agreement shall bear its own expenses in connection with
carrying out the terms of this Agreement.
TERMINATION
This Agreement may be terminated by the mutual agreement of the Trust and the
Acquired Fund. In addition, this Agreement may be terminated as follows at or
prior to the Closing Date:
(a) the Acquired Fund may terminate this Agreement by resolution of the Board of
Trustees of the Acquired Fund if, in good faith opinion of such Board,
proceeding with the Agreement is not in the best interests of the Acquired Fund
or the shareholders of the Acquired Fund; or
(b) the Trust may terminate this Agreement by resolution of the Board of
Trustees of the Trust if, in the good faith opinion of such Board, proceeding
with the Agreement is not in the best interests of the Trust or the shareholders
of the Trust.
AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon in writing by the authorized officers of the Acquired Fund
and the Trust; provided, however, that following the meeting of the Acquired
Fund Shareholders called by the Acquired Fund pursuant to paragraph 4.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund shares to be issued to the Acquired
Fund Shareholders under this Agreement to the detriment of such shareholders
without their further approval.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its President or Vice President and its seal to be affixed thereto
and attested by its Secretary or Assistant Secretary.
Attest: TEMPLETON VARIABLE PRODUCTS SERIES
FUND
on behalf of TEMPLETON STOCK FUND
_________________________________________ By:
- ----------------------------------------
Karen Skidmore, Asst. Secretary Debbie Gatzek, Vice President
Attest: TEMPLETON VARIABLE ANNUITY FUND
_________________________________________ By:
- ----------------------------------------
Karen Skidmore, Asst. Secretary Harmon Burns, Vice President
Exhibit B
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
TEMPLETON VARIABLE PRODUCTS SERIES FUND PROSPECTUS -- MAY 1, 1997
TEMPLETON STOCK FUND as amended December 1, 1997
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
Contracts involve certain fees and expenses not described in this Prospectus and
also may involve certain restrictions or limitations on the allocation of
purchase payments or Contract values to different investment vehicles. In
particular, certain series or classes of the Trust may not be available in
connection with a particular Contract or in a particular state. See the
applicable Contract prospectus for information regarding fees and expenses of
the Contract and any applicable restrictions or limitations.
The Fund has two classes of shares: Class 1 and Class 2. This prospectus offers
only Class 1 shares and is for use with Contracts that make Class 1-Shares
available. For more information about the Fund's classes, see "Other
Information--Capitalization and Voting Rights," below.
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, 500 East Broward Blvd., Suite 2100 Fort
Lauderdale, Florida 33396-3091 or by calling 1-800-774-5001 or 1-813-823-8712.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS PAGE
- ---------------------
EXPENSE SUMMARY..................... .T-2
FINANCIAL HIGHLIGHTS..................... T-3
INVESTMENT OBJECTIVE AND POLICIES........ T-4
DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES.................... T-4
RISK FACTORS............................. T-7
PURCHASE OF SHARES....................... T-9
NET ASSET VALUE.......................... T-10
REDEMPTION OF SHARES.................... T-10
EXCHANGES............................... T-10
MANAGEMENT OF THE TRUST................. T-10
DIVIDENDS AND DISTRIBUTIONS............. T-12
FEDERAL INCOME TAX STATUS............... T-12
OTHER INFORMATION....................... T-13
- --------------------------------------------------------------------------------
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 VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS OFFERING THE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
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.
EXPENSE SUMMARY - CLASS 1 SHARES
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1996. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.70%*
Other Expenses 0.18%
TOTAL FUND OPERATING EXPENSES 0.88%*
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$9 $28 $49 $108
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
*Management fees and total operating expenses have been restated to reflect the
management fee schedule approved by shareholders and effective May 1, 1997. See
"Management of the Fund" below for details. Actual management fees and total
fund operating expenses before May 1, 1997 were lower.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988*
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE (for a
share outstanding
throughout the year)
NET ASSET VALUE,
BEGINNING OF YEAR..... $20.83 $16.94 $17.53 $13.33 $12.72 $10.29 $11.75 $10.25 $10.00
- ---------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .41 .40 .26 .23 .25 .27 .32 .18 .18
Net realized and
unrealized gain
(loss)............... 3.88 3.80 (.64) 4.23 .64 2.49 (1.57) 1.34 .071
-------- -------- -------- -------- -------- -------- ------- ------- -----
TOTAL FROM INVESTMENT
OPERATIONS........... 4.29 4.20 (.38) 4.46 .89 2.76 (1.25) 1.52 .25
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net
investment income..... (.40) (.27) (.21) (.25) (.28) (.33) (.19) (.02) --
Distributions from net
realized gains........(1.84) (.04) (.01) (.02)
-------- -------- -------- -------- -------- -------- ------- ------- -----
TOTAL DISTRIBUTIONS.. (2.24) (.31) (.21) (.26) (.28) (.33) (.21)
(.02) --
- ---------------------------------------------------------------------------------------------------------------
Change in net asset
value.................. 2.05 3.89 (.59) 4.20 .61 2.43 (1.46) 1.50 .25
-------- -------- -------- -------- ------ -- -------- ------- ------- -----
NET ASSET VALUE,
END OF YEAR......... $ 22.88 $ 20.83 $ 16.94 $17.53 $13.33 $12.72 $ 10.29 $ 11.00 $10.23
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+........ 22.48% 25.24% (2.20)% 34.00% 7.12% 27.93% (10.23)% 14.85% 2.50%
RATIOS/SUPPLEMENTAL DATA
Net assets
end of year (000)....$644,366 $498,777 $378,849 $298,392 $166,219 $116,943 $74,264 $49,787 $3,037
Ratio of expenses to
average net assets... .65% .66% .73% .73% .75% .82% .85% 1.08% 4.39%**
Ratio of expenses, net
of reimbursement, to
average net assets.... .65% .66% .73% .73% .75% .82% .85% .99% 1.50%**
Ratio of net investment
income to average
net assets........... 2.06% 2.18% 1.81% 1.88% 2.36% 2.82% 3.78% 3.63% 5.55%**
Portfolio turnover rate 23.40% 33.93% 5.10% 4.88% 8.10% 41.24% 17.94% 5.27% --
Average commission rate
paid (per share). $.009
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Period from August 31, 1988 (commencement of operations) to December 31,
1988.
** Annualized.
+ Total return figures do not include charges applied under the contracts.
Inclusion of such charges would reduce the total return figures for all
periods shown.
T-3
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.
T-4
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. 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 or other advantageous developments appear
likely in the future. As a fundamental policy, 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
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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 federal securities laws, 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.
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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
T-7
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 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 (including risk of total 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 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.
Hong Kong reverted to the sovereignty of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of Fund investments.
The Fund may invest in companies with relatively small revenues and limited
product lines. Smaller capitalization 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, smaller 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
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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. See "Investment
Objectives and Policies--Debt Securities" in the SAI for descriptions of debt
securities rated lower than 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.
The 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 the 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, the 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 the 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.
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 ("Separate Accounts") of insurance companies
("Insurance Companies") to serve as the underlying investment vehicle for both
variable annuity and variable life insurance contracts ("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 the 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.
T-9
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.
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
class or fund and a purchase of shares of one or more of the other classes or
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 through 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.
T-10
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
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1996, the Fund paid 0.47% 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 ("Administrator"), 100 Fountain Parkway, St.
Petersburg, Florida 33716-1205, telephone (800) 774-5001 or (813) 823-8712,
provides certain administrative services and facilities for the Fund.
During the fiscal year ended December 31, 1996, administration fees totaling
0.11% of the average daily net assets of the Trust were paid to the
Administrator. 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 0.65% of the Fund's daily net assets.
DISTRIBUTOR
The Trust's principal underwriter is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205, toll free telephone (800)
292- 9293.
T-11
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 Rule 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.
T-12
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 federal securities law.
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 Accounts, as Shareholders of the Trust, are entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Accounts will generally vote their shares in
accordance with instructions received from owners of the variable contracts. See
the Separate Account prospectus 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 the
Trust at the telephone number or address listed on the cover page of this
prospectus.
T-13
EXHIBIT C
See enclosed TVPSF/Templeton Stock Fund Annual Report dated December 31,
1996.
ANNUAL REPORT
DECEMBER 31, 1996
[GLOBE GRAPHIC FLUSH LEFT IN BACKGROUND]
STOCK FUND
[LOGO]
FRANKLIN TEMPLETON
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TABLE OF CONTENTS
LETTER FROM THE PRESIDENT ................................................ 2
TEMPLETON STOCK FUND REPORT .............................................. 4
PERFORMANCE SUMMARY ...................................................... 6
INVESTMENT PORTFOLIO ..................................................... 9
FINANCIAL STATEMENTS ..................................................... 11
NOTES TO FINANCIAL STATEMENTS ............................................ 12
1
LETTER FROM THE PRESIDENT
February 18, 1997
Dear Contract Owner:
We are pleased to bring you the annual report of the Templeton Variable Products
Series Stock Fund for the twelve months ended December 31, 1996.
The year under review was characterized by strong advances in international
financial markets. Most equity markets performed well due to subdued inflation,
moderate economic growth, rising corporate earnings, and increased merger and
acquisition activity. Although many bond markets also strengthened, in general,
stocks fared better than fixed-income securities.
In the U.S., the Dow Jones(R) Industrial Average, which is composed of 30 large
industrial stocks, recorded 44 all-time highs and registered an impressive
return of more than 29% for the year.(1) Broader indices also provided stellar
results, with the Standard & Poor's 500(R) Stock Index rising nearly 23%.
Although small cap stocks suffered from a sell-off during the summer, the NASDAQ
composite index rose 23.2% in 1996.(2)
In Europe, many share prices rose as government efforts to meet standards for
membership in the European Monetary Union led to improved fiscal and monetary
policies and lower interest rates. The equity markets of Spain, Finland, and
Sweden performed especially well, with large gains in the banking and
telecommunications sectors. And despite high labor costs, a strong currency, and
a poor construction market, German stocks were among the best-performing in
Europe. Italy's market, although it was hurt by political scandals, a sluggish
economy, and high profile corporate problems, also produced a positive return.
Growing demand for products of third world countries, and recovery of developing
markets from the effects of Mexico's 1994 peso devaluation, caused equities in
many of these countries to appreciate during the period. Latin American markets,
in particular, delivered impressive returns. For example, as measured in U.S.
dollars, Brazil's Bovespa Index increased 54.6% and Mexico's Bolsa Index rose
18.9%.(2) Although some Asian stock markets declined due to slowing economies
and weakening currencies, Hong Kong's stock market rose substantially, posting
strong gains in the financial and real estate sectors.
With regard to debt securities, bond markets in developed countries provided
mixed results. Amid investor concerns about the strengthening U.S. economy, and
the possibility of higher interest rates, domestic bond prices declined
slightly. European bond
2
markets, on the other hand, rallied sharply, as central banks there lowered
interest rates in an effort to stimulate economic growth.
As a result of improved economic fundamentals and increased investor interest,
bond markets in developing countries significantly outperformed their
developed-market counterparts. The J.P. Morgan Emerging Markets Bond Index,
which tracks the performance of bond markets in nine developing nations,
produced a total return of 39.3%, while the Salomon Brothers World Government
Bond Index, representative of government bonds in 14 developed countries,
reported a total return of 3.6% for the same period.(2)
Currency movements also played an important role in global bond markets. During
the reporting period, the U.S. dollar appreciated 7.2% versus the German mark
and 11.8% versus the Japanese yen, which diminished the returns for U.S.
investors in these markets. However, the dollar declined against the Italian
lire and British pound, helping U.S. investors in bonds of those countries.
Looking forward, we are optimistic about global financial markets. We believe
that economies may continue to grow moderately while worldwide inflation levels
remain subdued. It is important, of course, to remember that securities markets
always have been - and always will be - subject to fluctuation. No one can
predict exactly how they will perform in the short term. However, history has
shown that over the long term, stocks and bonds have delivered impressive
results when left to compound. As always, we will continue to build and improve
our ability to serve investors while maintaining the traditional values and
principles that have served our clients well for so long.
We appreciate your participation in the Templeton Variable Products Stock Fund
and look forward to serving your investment needs in the years to come.
Sincerely,
/s/ Charles E. Johnson
- ----------------------------------------
Charles E. Johnson
President
Templeton Variable Products Series Fund
(1) Total return, calculated by Wilshire Associates, Inc., includes reinvested
dividends.
(2) Indices are unmanaged and include price appreciation and reinvested
interest or dividends.
3
TEMPLETON
STOCK FUND
The Templeton Stock Fund seeks capital growth through a policy of investing
primarily in common stocks issued by companies, large and small, in various
nations throughout the world.
We are pleased to report that the Fund delivered a total return of 22.48% for
the 12 months ended December 31, 1996, as discussed in the Performance Summary
on page 6. Its benchmark, the unmanaged Morgan Stanley Capital International(R)*
(MSCI) World Index, posted a total return of 14.00% for the same period. The
Fund's strong performance versus this index was in part the result of our
bottom-up, value style of investing and relative overweighting in markets that
performed exceptionally well during the period. You should keep in mind that
Fund performance does not reflect expenses associated with the variable
contract; had those expenses been included, performance would have been lower.
In the U.S., many equities rose in value during the reporting period due to
subdued inflation, moderate economic growth and strong corporate earnings. The
share price of our largest holding, Intel Corp., appreciated 130.7%,
considerably impacting the Fund's performance. The Fund also benefited from
significant gains in the banking sector, which prompted us to sell our holdings
of BankAmerica Corp., NationsBank Corp., and Barnett Banks Inc. at a profit. We
realized additional gains by selling our shares of Columbia Healthcare Corp. and
Tenet Healthcare Corp. when they hit our target prices. Consequently, our U.S.
exposure decreased from 29.8% of total net assets on December 31, 1995 to 19.4%
at the end of the reporting period.
Most European stocks performed well in 1996. The equity markets of Norway, Spain
and Sweden delivered impressive returns, which helped the Fund's performance
because, compared with the MSCI World Index, we were overweighted in all three
countries. During the year, our shares of Astra AB and Nycomed ASA rose
substantially, as the Swedish health and personal care industry strengthened.
Although the Austrian stock market turned in a lackluster performance compared
with other European markets, the share price of one of our holdings, Austrian
utilities company Evn Energie-Versorgung Niederoesterreich AG, increased 31.7%
during the period. This is a good example of how our bottom-up, value style of
investing can often help us discover companies that tend to perform well
regardless of the direction of the overall markets.
TEMPLETON STOCK FUND
Geographic Distribution, 12/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Country Net Assets
<S> <C>
Europe 52.1%
North America 21.7%
Asia 8.1%
Australia/New Zealand 7.6%
Latin America 5.7%
Middle East/Africa 0.7%
Short-Term Obligations & Other Net Assets 4.1%
</TABLE>
Latin American equity markets rebounded strongly in 1996 as a result of improved
economic fundamentals and renewed interest from foreign investors. The
telecommunications and electric utility industries performed well as demand for
these services continued to grow in many Latin American countries. The share
price of one of the Fund's largest holdings, Telebras-Telecomunicacoes
Brasileiras SA (Telebras), a Brazilian
* A registered trademark of Morgan Stanley and Co., Inc. Total return includes
reinvested dividends. One cannot invest directly in an index.
4
telecommunications company, appreciated nearly 60% during the fiscal year. We
believe demand for utility services will continue to increase, and the expected
deregulation of the Brazilian telephone industry could provide Telebras with
strong growth potential.
This discussion reflects the strategies we employed for the Fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
There are, of course, special risks involved with global investing related to
market, currency, economic, political, and other factors; developing markets
involve similar but heightened risks. These risks are discussed in the
prospectus.
TEMPLETON STOCK FUND
Top 10 Holdings on 12/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
Company, Industry, Country % of Total
Net Assets
<S> <C>
Intel Corp. Electronic
Components & Instruments, U.S. 2.7%
Telebras-Telecomunicacoes Brasileiras
SA, pfd., Telecommunications, Brazil 2.1%
Federal National Mortgage Assn.
Financial Services, U.S. 2.0%
Astra AB
Health & Personal Care, Sweden 1.7%
Alcatel Alsthom SA
Electrical & Electronics, France 1.6%
Iberdrola SA
Utilities - Electrical & Gas, Spain 1.6%
Rhone-Poulenc SA, A
Chemicals, France 1.6%
HSBC Holdings PLC
Banking, Hong Kong 1.6%
STET (Sta Finanziaria Telefonica
Torino) SPA, Telecommunications, Italy 1.5%
Nokia AB, A
Telecommunications, Finland 1.5%
</TABLE>
For a complete list of portfolio holdings, please see page 9 of this report.
IMPORTANT NOTICE
At a special meeting held on February 10, 1997, the shareholders of the
Templeton Stock Fund approved a new investment management agreement ("New
Agreement") between the Fund and its investment manager, Templeton Investment
Counsel, Inc. ("TICI"). The New Agreement provides for an increase in the rate
of the investment management fee payable by the Fund to TICI as follows: 0.75%
up to $200 million, 0.675% up to $1.3 billion and 0.60% over $1.3 billion (based
on average daily net assets of the Fund). The New Agreement will be effective on
May 1, 1997.
5
PERFORMANCE SUMMARY
The Templeton Stock Fund delivered a total return of 22.48% for the one-year
period ended December 31, 1996. Total return represents the change in the Fund's
share price, as measured by net asset value, and includes reinvestment of
dividends and capital gains. It does not include deductions at the Fund or
contract level for cost of insurance charges, premium load, administrative
charges, maintenance fees, premium tax charges, mortality and expense risk
charges or other charges that may be incurred under the variable insurance
contract for which the Fund serves as an underlying investment vehicle. If they
had been included, performance would have been lower. For a complete description
of expenses, including any applicable sales charges, please refer to the
contract prospectus.
TEMPLETON STOCK FUND
Periods Ended 12/31/96
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year (8/24/88)
<S> <C> <C> <C>
Average Annual
Total Return(1) 22.48% 14.45% 13.47%
Cumulative
Total Return(2) 22.48% 115.25% 187.45%
Value of $10,000
Investment(3) $12,248 $21,525 $28,745
</TABLE>
One-Year Total Return(4)
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
<S> <C> <C> <C> <C> <C>
7.12% 34.00% -2.20% 25.24% 22.48%
</TABLE>
(1) Average annual total return represents the average annual increase in value
of an investment and assumes reinvestment of dividends and capital gains.
(2) Cumulative total return represents the change in the Fund's net asset value
over the periods indicated and assumes reinvestment of dividends and capital
gains.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the specified periods and assume reinvestment of dividends and
capital gains.
(4) Total return represents the actual change in value of an investment over the
one-year periods ended on the specified dates.
Note: Total return figures do not include any variable insurance contract fees
and charges, which are described in the Performance Summary. Past expense
reductions by the Fund Manager increased the Fund's total returns. Investment
return and principal value will fluctuate with market conditions, currencies and
the economic and political climates of the countries where investments are made,
and shares, when redeemed, may be worth more or less than their initial cost.
Past performance is not predictive of future results.
6
The graph below shows how a $10,000 investment in the Fund since inception has
significantly outperformed the unmanaged Morgan Stanley Capital International
(MSCI) World Index.(1) It also shows how an investment in the Fund over the same
period has kept your purchasing power ahead of inflation, as measured by the
Consumer Price Index (CPI).(2) Please remember that the Fund's performance
differs from that of an index because an index does not contain cash (the Fund
generally carries a certain percentage of cash at any given time) and includes
no management charges or other expenses. Of course, one cannot invest directly
in an index.
(1) The Morgan Stanley Capital International (MSCI) World Index includes
approximately 1,500 companies representing the stock markets of 22 countries
including the U.S., Europe, Canada, Australia, New Zealand, and the Far East.
The average company in the index has a market capitalization of about $3.5
billion.
(2) The Consumer Price Index is a measure of the average change in prices for a
fixed basket of goods and services regularly bought in the U.S.
TEMPLETON STOCK FUND
Total Return Index Comparison - $10,000 Investment (8/24/88 - 12/31/96)
[LINE GRAPH]
8/24/88
Inception: Templeton Stock Fund MSCI World Index CPI
8/24/88 $10000 $10,000 $10,000
8/31/88 $*10000 -1.24% $9,876 0.09% $10,009
9/30/88 $10060 4.26% $10,297 0.67% $10,077
10/31/88 $10370 6.67% $10,984 0.33% $10,110
11/30/88 $10240 3.50% $11,368 0.08% $10,118
12/31/88 $10270 0.92% $11,473 0.17% $10,135
1/31/89 $10750 3.64% $11,890 0.50% $10,186
2/28/89 $10560 -0.61% $11,818 0.41% $10,228
3/31/89 $10760.4 -0.62% $11,745 0.58% $10,287
4/30/89 $11010.9 2.32% $12,017 0.65% $10,354
5/31/89 $10980.8 -2.44% $11,724 0.57% $10,413
6/30/89 $10810.5 -1.11% $11,594 0.24% $10,438
7/31/89 $11521.8 11.32% $12,906 0.24% $10,463
8/31/89 $11812.4 -2.40% $12,596 0.16% $10,480
9/30/89 $11782.3 2.84% $12,954 0.32% $10,513
10/31/89 $11101 -3.32% $12,524 0.48% $10,564
11/30/89 $11281.4 4.01% $13,026 0.24% $10,589
12/31/89 $11772.3 3.23% $13,447 0.16% $10,606
1/31/90 $11341.5 -4.65% $12,822 1.03% $10,715
2/28/90 $11411.6 -4.27% $12,274 0.47% $10,765
3/31/90 $11614.3 -6.02% $11,535 0.55% $10,825
4/30/90 $11175.4 -1.42% $11,372 0.16% $10,842
5/31/90 $12022.5 10.55% $12,571 0.23% $10,867
6/30/90 $12032.7 -0.70% $12,483 0.54% $10,926
7/31/90 $12032.7 0.93% $12,599 0.38% $10,967
8/31/90 $11165.2 -9.34% $11,423 0.92% $11,068
9/30/90 $10144.6 -10.53% $10,220 0.84% $11,161
10/31/90 $10011.9 9.36% $11,176 0.60% $11,228
11/30/90 $10318.1 -1.62% $10,995 0.22% $11,253
12/31/90 $10491.6 2.11% $11,227 0.00% $11,253
1/31/91 $11063.1 3.68% $11,640 0.60% $11,320
2/28/91 $11808.2 9.27% $12,720 0.15% $11,337
3/31/91 $11726.8 -2.93% $12,347 0.15% $11,354
4/30/91 $11737.3 0.80% $12,446 0.15% $11,371
5/31/91 $12115.2 2.28% $12,729 0.30% $11,405
6/30/91 $11495.8 -6.16% $11,945 0.29% $11,438
7/31/91 $12188.7 4.74% $12,511 0.15% $11,455
8/31/91 $12367.2 -0.30% $12,474 0.29% $11,489
9/30/91 $12472.2 2.64% $12,803 0.44% $11,539
10/31/91 $12629.7 1.64% $13,013 0.15% $11,557
11/30/91 $12283.2 -4.34% $12,448 0.29% $11,590
12/31/91 $13354 7.30% $13,357 0.07% $11,598
1/31/92 $13396 -1.83% $13,113 0.15% $11,616
2/29/92 $13826.5 -1.71% $12,888 0.36% $11,657
3/31/92 $13543.5 -4.69% $12,284 0.51% $11,717
4/30/92 $13994.2 1.41% $12,457 0.14% $11,733
5/31/92 $14509.3 4.00% $12,956 0.14% $11,750
6/30/92 $14155.2 -3.33% $12,524 0.36% $11,792
7/31/92 $14187.4 0.27% $12,558 0.21% $11,817
8/31/92 $13886.9 2.45% $12,866 0.28% $11,850
9/30/92 $13897.6 -0.90% $12,750 0.28% $11,883
10/31/92 $13768.9 -2.69% $12,407 0.35% $11,925
11/30/92 $14015.7 1.81% $12,631 0.14% $11,941
12/31/92 $14305.4 0.83% $12,736 -0.07% $11,933
1/31/93 $14498.6 0.35% $12,781 0.49% $11,991
2/28/93 $14831.3 2.39% $13,086 0.35% $12,033
3/31/93 $15309.6 5.82% $13,848 0.35% $12,075
4/30/93 $15550.2 4.65% $14,492 0.28% $12,109
5/31/93 $16042.3 2.32% $14,828 0.14% $12,126
6/30/93 $16129.7 -0.82% $14,706 0.14% $12,143
7/31/93 $16370.3 2.08% $15,012 0.00% $12,143
8/31/93 $17442 4.60% $15,703 0.28% $12,177
9/30/93 $17573.2 -1.83% $15,416 0.21% $12,203
10/31/93 $18316.8 2.77% $15,843 0.41% $12,253
11/30/93 $17857.5 -5.64% $14,949 0.07% $12,261
12/31/93 $19169.8 4.91% $15,683 0.00% $12,261
1/31/94 $20230.5 6.61% $16,720 0.27% $12,295
2/28/94 $19508.8 -1.28% $16,506 0.34% $12,336
3/31/94 $18604.1 -4.29% $15,798 0.34% $12,378
4/30/94 $18891.8 3.11% $16,289 0.14% $12,396
5/31/94 $19146.3 0.27% $16,333 0.07% $12,404
6/30/94 $18593 -0.27% $16,289 0.34% $12,446
7/31/94 $19533.7 1.92% $16,601 0.27% $12,480
8/31/94 $20242 3.02% $17,103 0.40% $12,530
9/30/94 $19622.2 -2.61% $16,656 0.27% $12,564
10/31/94 $19821.4 2.87% $17,135 0.07% $12,573
11/30/94 $18980.3 -4.32% $16,394 0.13% $12,589
12/31/94 $18747.9 0.99% $16,557 0.00% $12,589
1/31/95 $18515.5 -1.48% $16,312 0.40% $12,639
2/28/95 $19074.4 1.48% $16,553 0.40% $12,690
3/31/95 $19412.4 4.84% $17,354 0.33% $12,732
4/30/95 $20156 3.51% $17,963 0.33% $12,774
5/31/95 $20910.9 0.87% $18,120 0.20% $12,799
6/30/95 $21395.3 -0.01% $18,118 0.20% $12,825
7/31/95 $22454.4 5.02% $19,027 0.00% $12,825
8/31/95 $22217.8 -2.21% $18,607 0.26% $12,858
9/30/95 $22848.7 2.93% $19,152 0.20% $12,884
10/31/95 $22330.5 -1.56% $18,853 0.33% $12,926
11/30/95 $22860 3.49% $19,511 -0.07% $12,917
12/31/95 $23479.7 2.94% $20,085 -0.07% $12,908
1/31/96 $23941.6 1.83% $20,452 0.59% $12,985
2/29/96 $24335.1 0.63% $20,581 0.32% $13,026
3/31/96 $24850.2 1.68% $20,927 0.52% $13,094
4/30/96 $25390.4 2.37% $21,423 0.39% $13,145
5/31/96 $25767.3 0.10% $21,444 0.19% $13,170
6/30/96 $25955.7 0.52% $21,556 0.06% $13,178
7/31/96 $24850.2 -3.52% $20,797 0.19% $13,203
8/31/96 $25717 1.17% $21,040 0.19% $13,228
9/30/96 $26332.6 3.93% $21,867 0.32% $13,270
10/31/96 $26734.7 0.72% $22,025 0.32% $13,313
11/30/96 $28154.3 5.62% $23,263 0.19% $13,338
12/31/96 $28744.8 -1.58% $22,895 0.00% $13,338
* NOTE: Inception date is 08/24/88
(1) Total return measures the change in the Fund's net asset value over the
period shown, assuming reinvestment of dividends and capital gains. It does not
include any variable insurance contract fees and charges, which are described
in the Performance Summary. Past performance is not predictive of future
results.
(2) Index is unmanaged and includes reinvested dividends.
(3) Source: U.S. Bureau of Labor Statistics.
7
[LOGO]
FRANKLIN TEMPLETON
700 Central Avenue
St. Petersburg, FL 33701
[GLOBE GRAPHIC FLUSH RIGHT]
This report must be preceded or accompanied by the Templeton Variable Products
Series Fund prospectus which sets forth the costs, risks and advantages of an
investment in the funds. These reports and prospectuses do not constitute an
offering in any jurisdiction in which such offering may not lawfully be made.
TEMPLETON STOCK FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 20.83 $ 16.94 $ 17.53 $ 13.33 $ 12.72
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .41 .40 .26 .23 .25
Net realized and unrealized gain (loss) 3.88 3.80 (.64) 4.23 .64
-------- -------- -------- -------- --------
Total from investment operations 4.29 4.20 (.38) 4.46 .89
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income (.40) (.27) (.21) (.25) (.28)
Distributions from net realized gains (1.84) (.04) -- (.01) --
-------- -------- -------- -------- --------
Total distributions (2.24) (.31) (.21) (.26) (.28)
-------- -------- -------- -------- --------
Change in net asset value 2.05 3.89 (.59) 4.20 .61
-------- -------- -------- -------- --------
Net asset value, end of year $ 22.88 $ 20.83 $ 16.94 $ 17.53 $ 13.33
======== ======== ======== ======== ========
TOTAL RETURN* 22.48% 25.24% (2.20)% 34.00% 7.12%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $644,366 $498,777 $378,849 $298,392 $166,219
Ratio of expenses to average net assets .65% .66% .73% .73% .75%
Ratio of net investment income to average net assets 2.06% 2.18% 1.81% 1.88% 2.36%
Portfolio turnover rate 23.40% 33.93% 5.10% 4.88% 8.10%
Average commission rate paid (per share) $ .009
</TABLE>
* TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE FUND OR CONTRACT LEVEL FOR
COST OF INSURANCE CHARGES, PREMIUM LOAD, ADMINISTRATIVE CHARGES, MORTALITY AND
EXPENSE RISK CHARGES OR OTHER CHARGES THAT MAY BE INCURRED UNDER THE VARIABLE
ANNUITY CONTRACT FOR WHICH THE FUND SERVES AS AN UNDERLYING INVESTMENT
VEHICLE.
SEE NOTES TO FINANCIAL STATEMENTS.
8
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS: 92.8%
APPLIANCES & HOUSEHOLD DURABLES: 1.0%
Sony Corp. 94,000 $ 6,160,608
------------
AUTOMOBILES: 2.6%
Fiat Spa 2,058,000 6,205,223
Ford Motor Co. 130,000 4,143,750
Volvo AB, B 290,500 6,410,735
------------
16,759,708
------------
BANKING: 10.3%
Banco Bilbao Vizcaya 73,200 3,952,490
Bankinter SA 50,000 7,752,744
Banque Nationale de Paris 181,204 7,017,505
Banque Nationale de Paris, ADR, 144A 10,600 410,507
Credit Suisse Group Holding, br. 40,000 4,109,077
Deutsche Bank AG 128,000 5,981,930
Fokus Bank AS 1,160,000 7,966,134
HSBC Holdings PLC 466,562 9,983,323
National Australia Bank Ltd. 332,376 3,909,995
Sparbanken Sverige AB, A 343,000 5,884,440
Sparbanken Sverige AB, A, 144A 152,200 2,611,113
Unidanmark AS, A 125,900 6,520,547
------------
66,099,805
------------
BROADCASTING & PUBLISHING: 0.9%
News Corp. Ltd. 96,667 510,189
News Corp. Ltd., ADR 260,000 5,427,500
------------
5,937,689
------------
BUILDING MATERIALS & COMPONENTS: 2.2%
Cie de Saint Gobain 52,600 7,446,172
Pioneer International Ltd. 2,273,600 6,776,886
------------
14,223,058
------------
BUSINESS & PUBLIC SERVICES: 2.7%
Lex Service PLC 1,250,000 6,809,538
Wheelabrator Technologies Inc. 370,000 6,012,500
WMX Technologies Inc. 150,000 4,893,750
------------
17,715,788
------------
CHEMICALS: 4.0%
Akzo Nobel NV 65,000 8,885,027
Rhone-Poulenc SA, A 292,716 9,986,781
Solvay SA 10,800 6,612,245
------------
25,484,053
------------
DATA PROCESSING & REPRODUCTION: 1.8%
*Bay Networks Inc. 217,000 4,529,875
*Newbridge Networks Corp. 260,000 7,345,000
------------
11,874,875
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
ELECTRICAL & ELECTRONICS: 4.1%
Alcatel Alsthom SA 129,835 $ 10,436,881
*DSC Communications Corp. 73,700 1,317,387
Hitachi Ltd. 274,000 2,555,220
Motorola Inc. 123,700 7,592,087
Scitex Corp. Ltd. 461,400 4,383,300
------------
26,284,875
------------
ELECTRONIC COMPONENTS &
INSTRUMENTS: 3.7%
BICC 1,400,000 6,643,369
Intel Corp. 132,000 17,283,750
------------
23,927,119
------------
ENERGY SOURCES: 2.7%
Societe Elf Aquitane SA 92,520 8,427,617
Total SA, B 97,135 7,905,684
Transportadora de Gas del Sur SA, ADR,
B 77,700 951,825
------------
17,285,126
------------
FINANCIAL SERVICES: 5.4%
American Express Co. 125,000 7,062,500
Axa SA 110,830 7,053,790
Dean Witter Discover & Co. 110,612 7,328,045
Federal National Mortgage Assn. 353,600 13,171,600
------------
34,615,935
------------
FOOD & HOUSEHOLD PRODUCTS: 1.5%
Burns Philp & Co. Ltd. 3,177,503 5,657,425
Nestle SA 4,000 4,294,359
------------
9,951,784
------------
FOREST PRODUCTS & PAPER: 4.7%
*Asia Pacific Resources International, A 680,000 3,825,000
Assidomaen AB 150,000 4,178,978
Carter Holt Harvey Ltd. 1,239,126 2,811,955
*Enso Gutzeit OY, R 463,300 3,756,759
Fletcher Challenge Ltd. Forestry
Division 5,122,104 8,581,922
International Paper Co. 98,000 3,956,750
Stora Kopparbergs Bergslags AB, B 225,000 3,068,249
------------
30,179,613
------------
HEALTH & PERSONAL CARE: 4.4%
Astra AB, A 100,000 4,941,458
Astra AB, B 127,000 6,126,674
*Novartis A.G. 6,933 7,940,824
*Nycomed ASA, A 616,200 9,419,802
------------
28,428,758
------------
INDUSTRIAL COMPONENTS: 1.9%
Goodyear Tire & Rubber Co. 110,000 5,651,250
Madeco Manufacturera de Cobre SA, ADR 263,500 6,389,875
------------
12,041,125
------------
</TABLE>
9
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE: 6.0%
GIO Austrailia Holdings Ltd. 3,041,312 $ 7,783,980
HIH Winterthur International Holdings
Ltd. 1,617,286 4,049,321
Ing Groep NV 228,461 8,230,683
Partnerre Ltd. 209,000 7,106,000
Reliastar Financial Corp. 144,000 8,316,000
Torchmark Corp. 60,000 3,030,000
------------
38,515,984
------------
LEISURE & TOURISM: 1.4%
Kuoni Reisen Holding AG, B 3,700 8,983,937
------------
MERCHANDISING: 1.6%
Home Depot Inc. 110,000 5,513,750
House of Fraser PLC 1,901,700 5,000,701
------------
10,514,451
------------
METALS & MINING: 3.3%
Boehler Uddeholm AG 86,000 6,153,917
Eramet SA 126,087 6,614,400
Outokumpu OY, A 311,000 5,307,283
Reynolds Metals Co. 55,500 3,128,813
------------
21,204,413
------------
MULTI-INDUSTRY: 2.8%
Hutchison Whampoa Ltd. 865,600 6,798,785
Jardine Matheson Holdings Ltd. 512,501 3,382,507
Jardine Strategic Holdings Ltd. 350,048 1,267,174
*Jardine Strategic Holdings Ltd., wts. 38,894 15,558
La Cemento Nacional CA, GDR 400 91,600
La Cemento Nacional CA, GDR, 144A 4,600 1,053,400
Metro Pacific Corp. MDI 23,184,000 5,729,886
------------
18,338,910
------------
REAL ESTATE: 2.4%
*Fastighets AB Tornet, A 15,220 232,099
National Health Investors Inc. 203,500 7,707,563
Summit Properties Inc., REIT 337,000 7,456,125
------------
15,395,787
------------
TELECOMMUNICATIONS: 9.7%
Lucent Technologies Inc. 51,000 2,358,750
Nokia AB, A 169,000 9,809,348
*SPT Telecom AS 52,600 6,549,371
STET (Sta Finanziaria Telefonica
Torino) SPA 2,180,000 9,912,098
Telecom Italia Spa 3,610,800 9,384,269
Telefonica de Argentina SA, B, ADR 291,000 7,529,625
Telefonica de Espana SA 421,500 9,788,735
Telmex-Telefonos de Mexico SA, L, ADR 221,800 7,319,400
------------
62,651,596
------------
SHARES VALUE
--------- ------------
TEXTILES & APPAREL: 1.3%
Dawson International PLC 3,450,000 $ 3,398,345
*Fruit of the Loom Inc., A 125,000 4,734,375
------------
8,132,720
------------
TRANSPORTATION: 2.4%
Helikopter Services Group ASA 585,000 7,612,888
Koninklijke Nedlloyd NV 291,500 8,002,954
------------
15,615,842
------------
UTILITIES ELECTRICAL & GAS: 8.0%
*CEZ 100,000 3,600,059
Compania Sevillana de Electricidad 275,921 3,134,862
Consolidated Electric Power Asia Ltd. 3,849,400 9,033,113
Endesa-Empresa Nacional de
Electricidad SA 115,000 8,184,864
Evn Energie-Versorgung
Niederoesterreich AG 63,600 9,571,857
Iberdrola SA 706,000 10,006,085
VEBA AG 140,000 8,053,299
------------
51,584,139
------------
TOTAL COMMON STOCKS (cost $451,341,338) 597,907,698
------------
PREFERRED STOCKS: 3.1%
Jardine Strategic Holdings Ltd.,
7.50%, conv., 5/07/49 2,831,000 3,383,045
News Corp. Ltd., pfd. 250,067 1,113,087
News Corp. Ltd., pfd., ADR 130,000 2,291,250
Telebras-Telecomunicacoes Brasileiras
SA, pfd. 143,434,677 11,042,993
Telebras-Telecomunicacoes Brasileiras
SA, pfd., ADR 31,300 2,394,450
------------
TOTAL PREFERRED STOCKS (cost $9,487,540) 20,224,825
------------
PRINCIPAL
IN LOCAL
CURRENCY**
------------
SHORT TERM OBLIGATIONS: 4.0%
(cost $25,435,491)
U.S. Treasury Bills, 4.78% to 5.00%
with maturities to 3/27/97 25,605,000 25,440,792
------------
TOTAL INVESTMENTS: 99.9%
(cost $486,264,369) 643,573,315
OTHER ASSETS, LESS LIABILITIES: 0.1% 792,450
------------
TOTAL NET ASSETS: 100.0% $ 644,365,765
============
</TABLE>
* NON-INCOME PRODUCING.
** PRINCIPAL AMOUNT IN CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
10
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $486,264,369) $643,573,315
Receivables:
Fund shares sold 76,002
Dividends and interest 1,403,239
------------
Total assets 645,052,556
------------
Liabilities:
Payables:
Investment securities purchased 10,048
Fund shares redeemed 160,366
Accrued expenses 516,377
------------
Total liabilities 686,791
------------
Net assets, at value $644,365,765
============
Net assets consist of:
Undistributed net investment income $ 11,508,408
Net unrealized appreciation 157,308,946
Accumulated net realized gain 53,211,617
Net capital paid in on shares of beneficial interest 422,336,794
------------
Net assets, at value $644,365,765
============
Shares outstanding 28,162,508
============
Net asset value per share
($644,365,765 / 28,162,508) $ 22.88
============
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income: (net of $1,398,243 foreign
taxes withheld)
Dividends $13,250,747
Interest 1,971,113
--------------
Total income $ 15,221,860
Expenses:
Management fees (Note 3) 2,627,573
Administrative fees (Note 3) 617,503
Custodian fees 264,644
Reports to shareholders 27,500
Audit fees 27,000
Legal fees 7,500
Registration and filing fees 30,730
Trustees' fees and expenses 28,900
Other 4,067
--------------
Total expenses 3,635,417
------------
Net investment income 11,586,443
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 53,553,502
Foreign currency transactions (189,470)
--------------
53,364,032
Net unrealized appreciation on investments 50,486,029
--------------
Net realized and unrealized gain 103,850,061
------------
Net increase in net assets resulting
from operations $115,436,504
============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 11,586,443 $ 9,721,522
Net realized gain on investment and foreign currency transactions 53,364,032 44,465,018
Net unrealized appreciation 50,486,029 44,760,510
-------------- ------------
Net increase in net assets resulting from operations 115,436,504 98,947,050
Distributions to shareholders:
From net investment income (9,701,533) (6,245,065)
From net realized gain (44,505,784) (809,545)
Fund share transactions (Note 2) 84,359,449 28,036,136
-------------- ------------
Net increase in net assets 145,588,636 119,928,576
Net assets:
Beginning of year 498,777,129 378,848,553
-------------- ------------
End of year $644,365,765 $498,777,129
============== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Stock Fund (the Fund) is a separate series of Templeton Variable
Products Series Fund (the Trust), a Massachusetts business trust, which is an
open-end, diversified management investment company registered under the
Investment Company Act of 1940.
The Fund seeks capital growth through a policy of investing primarily in common
stocks issued by companies, large and small, in various nations throughout the
world. The following summarizes the Fund's significant accounting policies.
A. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange on
which the securities are traded. Over-the-counter securities and listed
securities for which no sale is reported are valued at the mean between the last
current bid and asked prices. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by
management and approved by the Board of Trustees.
B. FOREIGN CURRENCY TRANSACTIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign currencies
are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it will
customarily enter into a foreign exchange contract to minimize currency risk
from the trade date to the settlement date of such transaction.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at the end of the
fiscal period, resulting from changes in the exchange rate.
C. INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
D. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund normally pays an annual dividend representing substantially all of its
net investment income and distributes annually any net realized capital gains.
Distributions to shareholders, which are determined in accordance with income
tax regulations, are recorded on the ex-dividend date.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividends on foreign securities are
recorded as soon as information is available to the Fund. Interest income and
estimated expenses are accrued daily.
F. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
12
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At December 31, 1996, there was an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 4,324,078 $ 89,638,950 4,174,973 $ 78,300,364
Shares issued on reinvestment of 2,791,314 54,207,317 416,778 7,056,045
Shares redeemed (2,892,776) (59,486,818) (3,012,672) (57,320,273)
---------- ----------- ---------- ------------
Net increase 4,222,616 $ 84,359,449 1,579,079 $ 28,036,136
========== =========== ========== ============
</TABLE>
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Trust are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), and Templeton Funds Annuity Company (TFAC), the
Fund's investment manager and administrative manager, respectively.
The Fund pays a monthly investment management fee, equal on an annual basis, to
0.50% of its average daily net assets up to $200 million, 0.45% of such net
assets from $200 million up to $1.3 billion, and 0.40% of such net assets in
excess of $1.3 billion.
On February 10, 1997, the Fund's shareholders approved an increase in management
fees, effective May 1, 1997. Under the new fee arrangements, the Fund pays a
monthly investment management fee, equal on an annual basis to .75% of its
average daily net assets up to $200 million, .675% of such assets from $200
million up to $1.3 billion, and .60% of such assets in excess of $1.3 billion.
The Fund pays TFAC its allocable share of a monthly fee equivalent on an annual
basis to 0.15% of the combined average daily net assets of the Trust, reduced to
0.135% of such assets in excess of $200 million, 0.10% of such assets in excess
of $700 million, 0.075% of such assets in excess of $1.2 billion.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel for
the Fund, which firm received fees for the year ended December 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1996 aggregated $211,301,102 and $123,058,974, respectively.
The cost of securities for federal income tax purposes is the same as that shown
in the investment portfolio. Realized gains and losses are reported on an
identified cost basis.
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of portfolio securities, based on cost for federal income tax
purposes, was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $173,065,018
Unrealized depreciation (15,756,072)
------------
Net unrealized appreciation $157,308,946
============
</TABLE>
13
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Stock Fund series of Templeton Variable
Products Series Fund (the Trust) as of December 31, 1996, and the related
statement of operations, the statements of changes in net assets and the
financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Stock Fund series of Templeton Variable Products Series Fund as of
December 31, 1996, the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
January 31, 1997, except for the third
paragraph of Note 3, as to which
the date is February 10, 1997.
14
NOTES
--------
NOTES
--------
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
VOTING INSTRUCTION CARD
TEMPLETON VARIABLE ANNUITY FUND
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
FEBRUARY 3, 1998
INDICATE YOUR VOTING INSTRUCTIONS BELOW BY CHECKING THE APPROPRIATE BOXES USING
BLUE OR BLACK INK.
THIS VOTING INSTRUCTION CARD, IF PROPERLY EXECUTED, WILL BE
VOTED IN THE MANNER DIRECTED BY THE CONTRACT OWNER. IF THIS VOTING INSTRUCTION
CARD IS EXECUTED AND NO DIRECTION IS MADE, THIS VOTING INSTRUCTION CARD WILL BE
VOTED FOR ALL PROPOSALS AND IN THE DISCRETION OF THE INSURANCE COMPANY UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Proposal 1. To approve an Agreement and Plan of Reorganization between the
Templeton Variable Annuity Fund and Templeton Variable Products Series Fund, on
behalf of the Templeton Stock Fund, that provides for the acquisition of
substantially all of the assets of the Templeton Variable Annuity Fund in
exchange for shares of the Templeton Stock Fund - Class 1 shares, the
distribution of such shares to the shareholders of the Templeton Variable
Annuity Fund, and the dissolution of the Templeton Variable Annuity Fund (the
"Merger Plan").
FOR AGAINST ABSTAIN
Proposal 2. To vote upon any other business which may legally come before the
Special Meeting or any adjournment thereof.
GRANT WITHHOLD
PLEASE SEE REVERSE SIDE
TEMPLETON FUNDS ANNUITY COMPANY
THESE VOTING INSTRUCTIONS ARE SOLICITED BY THE ABOVE-REFERENCED INSURANCE
COMPANY IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE TRUSTEES OF
TEMPLETON VARIABLE ANNUITY FUND.
Please sign, date and return all voting instruction cards received in the
enclosed postage paid envelope. Voting instructions must be received by February
2, 1998 to be voted for the Meeting of Shareholders to be held February 3, 1998.
The undersigned hereby instructs the above-referenced insurance company to vote
the shares of the Templeton Variable Annuity Fund attributable to the
undersigned's variable annuity contract at the Meeting of Shareholders to be
held at 500 East Broward Blvd., Fort Lauderdale, Florida 33394-3091, at 10:00
a.m., February 3, 1998, and any adjournments thereof, as indicated below, with
respect to the matters set forth on the reverse side and described in the Notice
of Special Meeting and Proxy Statement dated December 17, 1997, receipt of which
is hereby acknowledged.
PLEASE SIGN AND DATE BELOW If a Contrat is held jointly,
each Contract Owner should sign. If only one signs, his or
her signature will be binding. If the Contract Owner is a
corporation, the President or a Vice President should sign
in his or her own name, indicating title. If the Contract
Owner is a partnership, a partner should sign in his or her
own name, indicating that he or she is a "Partner." If the
Contract Owner is a trust, the trustee should sign in his or
her own name, indicating that he or she is a "Trustee."
----------------------------------------
Signature(s) Title(s), if
applicable
DATE:
----------------------------------------
Part B
STATEMENT OF ADDITIONAL INFORMATION
FOR
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Acquisition of the Assets of the
TEMPLETON VARIABLE ANNUITY FUND
By and in exchange for shares of the Templeton Stock Fund-Class 1 class of the
Templeton Stock Fund series of TEMPLETON VARIABLE PRODUCTS SERIES FUND (the
"TVPSF").
This Statement of Additional Information relates specifically to the proposed
delivery of substantially all of the assets of the Templeton Variable Annuity
JFund (the "Variable Annuity Fund") to and in exchange for shares of the
Templeton Stock Fund series (the "Stock Fund") of TVPSF.
This Statement of Additional Information consists of this Cover Page and the
following described documents, each of which is incorporated by reference herein
and enclosed herewith:
1. Statement of Additional Information of TVPSF dated May 1,
1997.
2. The audited financial statements of the Stock Fund Class 1
contained in the TVPSF Trust's Annual Report for the fiscal year
ended December 31, 1996, including the auditor's report (included
as Exhibit C to Part A), and the unaudited financial statements
of the Stock Fund Class 1 contained in the TVPSF Trust's
Semi-Annual Report dated June 30, 1997.
3. The audited financial statements contained in the Variable
Annuity Fund's Annual Report for the fiscal year ended December
31, 1996, including the auditor's report, and the unaudited
financial statements contained in the Variable Annuity Fund's
Semi-Annual Report dated June 30, 1997.
This Statement of Additional Information is not a Prospectus; a Proxy
Statement/Prospectus dated December 17, 1997, relating to the above-referenced
transaction may be obtained from TVPSF, 500 East Broward Blvd., Ft. Lauderdale,
Florida 33394-3091, 1-800/774-5001 and the Variable Annuity Fund at 500 East
Broward Blvd., Ft. Lauderdale, Florida 33394-3091, 1-800/774-5001. This document
should be read in conjunction with such Proxy Statement/Prospectus. The date of
this Statement of Additional Information is December 17, 1997.
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
STATEMENT OF
ADDITIONAL INFORMATION
700 Central Avenue MAY 1, 1997
St. Petersburg, FL 33701 1-800/DIAL BEN
Table of ContentsPage
Introduction.......................................... 1
Investment Objectives and Policies ................... 2
Investment Restrictions .............................. 13
Officers and Trustees................................. 14
Investment Management and
Other Services....................................... 20
Brokerage Allocation ................................. 22
Portfolio Turnover ................................... 23
Summary of Code of Ethics............................. 23
Purchase, Redemption and
Pricing of Shares ................................... 23
Redemptions in Kind................................... 25
Class 2 Distribution Plan............................. 25
Tax Status ........................................... 25
Description of Shares ................................ 28
Performance Information .............................. 28
Financial Statements ................................. 30
Appendix - Corporate Bond, Preferred Stock
and Commercial Paper Ratings ........................ 30
<PAGE>
INTRODUCTION
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.
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1997, IS NOT A
PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN
SET FORTH IN THE PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE YOU WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST
AND THE FUNDS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF EACH
FUND AND CLASS IN WHICH YOU MAY BE INTERESTED. 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.
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."
Convertible Securities. The Funds 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 Funds may invest are subject to
the same rating criteria and investment policies as the Funds' 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 Funds' financial reporting, credit rating, and investment limitation
purposes.
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 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 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
creditworthiness of 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.
Depositary Receipts. The Funds 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 Funds' investment policies, the
Funds' investments in Depositary Receipts will be deemed to be investments in
the underlying securities.
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, and under Section 817 of the Code
relating to the treatment of variable contracts issued by insurance companies.
As diversified funds under the 1940 Act, each 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.
Foreign Securities - General. 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. 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.
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.
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 the Money Market Fund) 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 high quality debt 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 deposit on 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 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 receive 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.
Each Fund 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 a Fund covers a call
option on a stock index through ownership of securities, such securities may
not match the composition of the index. In that event, a 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. A 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 done on 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 (except the Money Market Fund) 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 they have 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) pervasiveness 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
enforceability 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 can 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 in
securities 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 the 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 is 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 of 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 (i) the 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 (ii) 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 (iii)
the Stock, Asset Allocation, Developing Markets, International, Growth,
Mutual Discovery and Mutual Shares Funds may purchase and sell stock index
futures contracts; and (iv) Templeton Bond Fund may purchase and sell bond
index futures contracts.
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 any one 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 331/3% 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.
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.
As a non-fundamental policy, the Growth, Mutual Discovery and Mutual Shares
Funds will not 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.
The Franklin Growth Investments Fund will not, as a non-fundamental policy,
(i) invest for purposes of control of an issuer, (ii) invest more than 5% in
unseasoned issuers, (iii) use margin accounts or (iv) invest more than 10% of
its assets in illiquid securities.
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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk ("*").
Name, Address and Age Offices with Trust Principal Occupation During
Past Five Years
HARRIS J. ASHTON Trustee
Metro Center
1 Station Place
Stamford, Connecticut
Age 64
President, Chief Executive Officer
and Chairman of the Board, General
Host Corporation (nursery and craft
centers); Director, RBC Holdings,
Inc. (a bank 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.
NICHOLAS F. BRADY* Trustee
102 East Dover Street
Easton, Maryland
Age 65
Chairman of Templeton Emerging
markets Investment Trust PLC;
Chairman of Templeton Latin America
Investment Trust 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.
S. JOSEPH FORTUNATO Trustee
200 Campus Drive
Florham Park, New Jersey
Age 63
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; Director of
General Host Corporation; director,
trustee or managing general partner,
as the case may be, of 58 of the
investment companies in the Franklin
Templeton Group of Funds.
ANDREW H. HINES, JR. Trustee
150 2nd Avenue N.
St. Petersburg, Florida
Age 72
Consultant for the Triangle
Consulting Group; chairman and
director of Precise Power
Corporation; 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.
EDITH E. HOLIDAY Trustee
3239 38th Street, N.W.
Washington, D.C. 20016
Age 44
Director (1993-present) of Amerada
Hess Corporation and Hercules
Incorporated; director of Beverly
Enterprises, Inc. (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.
CHARLES B. JOHNSON* Chairman of
777 Mariners Island Blvd. the Board and
San Mateo, California Vice President
Age 63
President, chief executive officer,
and director of Franklin Resources,
Inc.; chairman of the board and
director of Franklin Advisers, Inc.
and Franklin 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.
BETTY P. KRAHMER Trustee
2201 Kentmere Parkway
Wilmington, Delaware
Age 67
Director or trustee of various civic
associations; formerly, economic
analyst, U.S. government; and
director or trustee of 23 of the
investment companies in the Franklin
Templeton Group of Funds.
GORDON S. MACKLIN Trustee
8212 Burning Tree Road
Bethseda, Maryland 20817
Age 67
Chairman, White River Corporation
(information and financial
services); Director, Fund American
Enterprises 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.
FRED R. MILLSAPS Trustee
2665 NE 37th Drive
Fort Lauderdale, Florida
Age 67
Manager of personal investments
(1978-present); director of various
other business and nonprofit
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.
CHARLES E. JOHNSON President
777 Mariners Island Blvd.
San Mateo, California
Age 39
Senior Vice President and Director,
Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton
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.
MARK G. HOLOWESKO Vice President
Lyford Cay
Nassau, Bahamas
Age 36
President and director of Templeton
Global Advisors Limited; chief
investment officer of the global
equity 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.
MARTIN L. FLANAGAN Vice President
777 Mariners island Blvd.
San Mateo, California
Age 36
Senior Vice President, Chief
Financial Officer and Treasurer,
Franklin Resources, Inc.; President,
Franklin 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.
SAMUEL J. FORESTER, JR. Vice President
500 East Broward Blvd.
Fort Lauderdale, Florida
Age 47
President of the Templeton Global
Bond Managers Division of Templeton
Investment Counsel, Inc.; president
or 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).
JOHN R. KAY Vice President
500 East Broward Blvd.
Fort Lauderdale, Florida
Age 56
Vice president and treasurer of
Templeton Global Investors, Inc. and
Templeton Worldwide, Inc.; assistant
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.
THOMAS J. LATTA Vice President
500 East Broward Blvd.
Fort Lauderdale, Florida
Age 35
Vice president of the Templeton
Global Bond Managers division of
Templeton Investment Counsel, Inc.;
vice president of various Templeton
Funds; formerly, portfolio manager,
Forester & Hairston (1988-1991);
investment adviser, Merrill Lynch,
Pierce, Fenner & Smith Incorporated
(1981-1988).
RUPERT H. JOHNSON, JR. Vice President
777 Mariners Island Blvd.
San Mateo, California
Age 55
Executive Vice President and
Director, Franklin Resources, Inc.
and Franklin Templeton Distributors,
Inc.; 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.
HARMON E. BURNS Vice President
777 Mariners Island Blvd.
San Mateo, California
Age 51
Executive Vice President, Secretary
and Director, Franklin Resources,
Inc.; Executive Vice President and
Director, 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.
DEBORAH R. GATZEK Vice President
777 Mariners Island Blvd.
San Mateo, California
Age 47
Senior Vice President and General
Counsel, Franklin Resources, Inc.;
Senior Vice President, Franklin
Templeton 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.
JAMES R. BAIO Treasurer
500 East Broward Blvd.
Fort Lauderdale, Florida
Age 42
Certified public accountant; senior
vice president of Templeton
Worldwide, Inc., Templeton Global
Investors, Inc., and 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.
*These are Trustees who are "interested persons" of the Trust as that term is
defined in the 1940 Act. Charles B. Johnson is an interested person due to
his ownership interest in Franklin Resources, Inc. 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. The remaining
Trustees are not interested persons ("independent Trustees").
The table above shows the Officers and Trustees who are affiliated with the
Trust's Principal Underwriter and Investment Managers. Nonaffiliated
trustees and Mr. Brady are paid 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. As shown above, some of
the nonaffiliated Trustees also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton
Group of Funds.
The following table shows the total fees paid to the nonaffiliated Trustees
by the Trust and by all investment companies in the Franklin Templeton Group
of Funds:
<TABLE>
<CAPTION>
Number of Boards Total
Aggregate in the Franklin Compensation
Fees Received Templeton Group from all Funds
from the of Funds on which in Franklin
Name of Trustee Trust* Trustee Serves*** Templeton Group*
<S> <C> <C> <C>
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 Diergardt-Naglo**............................... 7,697 20 66,375
S. Joseph Fortunato......................................... 7,350 58 360,411
Andrew H. Hines, Jr. ....................................... 8,027 22 130,525
Betty P. Krahmer............................................ 7,350 22 119,275
Gordon S. Macklin........................................... 7,680 53 335,541
Fred R. Millsaps............................................ 7,697 24 125,275
</TABLE>
*For the fiscal year ended December 31, 1996.
**Messrs. Clarke and Von Diergardt-Naglo resigned as Trustees during 1996.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 61 registered investment companies, with
approximately 171 U.S. based funds or series.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, and paid pro rata by
each fund in the Franklin Templeton Group of Funds for which they serve as
director, trustee or managing general partner. No officer or Board member
received any other compensation, including pension or retirement benefits,
directly or indirectly from the Fund or other funds in the Franklin Templeton
Group of Funds. Certain officers or Board members who are shareholders of
Resources may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
As of April 1, 1997, the officers and Trustees owned no shares of the Trust.
Many of the Board members own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
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 April 1, 1997, there
were 14,272,186.040 Shares of Templeton Money Market Fund outstanding;
3,116,453.177 Shares of Templeton Bond Fund outstanding; 31,723,925.674
Shares of Templeton Stock Fund outstanding; 29,745,368.077 Shares of
Templeton Asset Allocation Fund outstanding; 40,786,698.743 Shares of
Templeton International Fund outstanding; and 12,121,556,999 Shares of
Templeton Developing Markets Fund outstanding. As of April 1, 1997, Phoenix
Home Mutual Life Insurance Company ("Phoenix Home Life") owned 100% of the
outstanding Shares of Templeton Money Market Fund, 56.95% of the outstanding
Shares of Templeton Bond Fund, 48.90% of the outstanding Shares of Templeton
Stock Fund, 25.72% of the outstanding Shares of Templeton Asset Allocation
Fund, and 15.43% of the outstanding Shares of Templeton International Fund.
As of April 1, 1997, The Travelers Insurance Company ("The Travelers") owned
43.05% of the outstanding Shares of Templeton Bond Fund, 51.07% of the
outstanding Shares of Templeton Stock Fund, and 37.42% of the outstanding
Shares of Templeton Asset Allocation Fund. As of April 1, 1997, the Variable
Annuity Life Insurance Company ("VALIC") owned 36.80% of the outstanding
shares of Templeton Asset Allocation Fund and 78.16% of Templeton
International Fund. As of April 1, 1997, IDS/American Express ("IDS/AMEX"), a
Minnesota Corporation, on behalf of the Flexible Portfolio Annuity, owned
94.02% 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 April 1, 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 Managers and Services Provided. 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 Managers are
indirect wholly owned subsidiaries of Franklin Resources, Inc. ("Resources"),
a publicly traded company whose shares are listed on the NYSE.
The Investment Managers provide investment research and portfolio management
services, including the selection of securities for the Funds to buy, hold or
sell, and the selection of brokers through whom the Fund's portfolio
transactions are executed. Their activities are subject to the review and
supervision of the Board to whom they render periodic reports of the Funds'
investment activities. The Investment Managers are covered by fidelity
insurance on their officers, directors and employees for the protection of
the Funds.
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 "Brokerage
Allocation--Summary of Code of Ethics."
The Investment Management Agreements will continue in effect through February
1998 and 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.
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.
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.
For the fiscal year ended December 31, 1996, management fees for the
Developing Markets Fund, before any advance waiver, totaled $313,283. Under
an agreement by the Investment Manager to limit its fees, the Fund paid
management fees totaling $293,918.
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 ................. $ 55,132 $ 74,375 $ 88,106
Templeton Bond Fund ......................... $ 162,273 $ 156,062 $ 149,843
Templeton Stock Fund ........................ $2,627,573 $2,102,259 $1,686,602
Templeton Asset Allocation Fund ............. $2,245,898 $1,662,023 $1,186,540
Templeton International Fund ................ $2,445,202 $1,222,834 $ 404,532
Templeton Developing Markets Fund............ $ 293,918
Fund Administrator. Templeton Funds Annuity Company ("TFAC") performs certain
administrative functions as Fund Administrator for the Trust. These include
preparing and maintaining books, records and tax and financial reports, and
monitoring compliance with regulatory requirements. TFAC is a wholly owned
and subsidiary of Resources.
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. During the fiscal years ended
December 31, 1996, 1995, and 1994, the Fund Administrator received fees of
$1,801,632, $1,380,760, $1,006,867 respectively.
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 and review
of the Trust's filings with the Securities and Exchange Commission ("SEC").
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 Investment Managers select brokers and dealers to execute the Funds'
portfolio transactions in accordance with criteria set forth in the
management agreement and any directions that the Board may give.
When placing a portfolio transaction, the Investment Managers seek to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by a
Fund is negotiated between the Investment Managers and the broker executing
the transaction. The determination and evaluation of the reasonableness of
the brokerage commissions paid are based to a large degree on the
professional opinions of the persons responsible for placement and review of
the transactions. These opinions are based on the experience of these
individuals in the securities industry and information available to them
about the level of commissions being paid by other institutional investors of
comparable size. The Investment Managers will ordinarily place orders to buy
and sell over-the-counter securities on a principal rather than agency basis
with a principal market maker unless, in the opinion of the Investment
Managers, a better price and execution can otherwise be obtained. Purchases
of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
The Investment Managers may pay certain brokers commissions that are higher
than those another broker may charge, if the Investment Mangers determine in
good faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or the Investment Managers' overall
responsibilities to client accounts over which they exercise investment
discretion. The services that brokers may provide to the Investment Managers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and
other information that provides lawful and appropriate assistance to the
Investment Managers in carrying out their investment advisory
responsibilities. These services may not always directly benefit a Fund. They
must, however, be of value to the Investment Managers in carrying out their
overall responsibilities to their clients.
A Fund seeks to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the Investment Managers receive from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the Investment Managers to
supplement their own research and analysis activities and to receive the
views and information of individuals and research staffs of other securities
firms. As long as it is lawful and appropriate to do so, the Investment
Managers and their affiliates may use this research and data in their
investment advisory capacities with other clients. If a Fund's officers are
satisfied that the best execution is obtained, the sale of Fund shares, as
well as shares of other funds in the Franklin Templeton Group of Funds, may
also be considered a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to the Investment Managers will be reduced by
the amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of a Fund and one or more other
investment companies or clients supervised by the Investment Managers are
considered at or about the same time, transactions in these securities will
be allocated among the several investment companies and clients in a manner
deemed equitable to all by the Investment Managers, taking into account the
respective sizes of the funds and the amount of securities to be purchased or
sold. In some cases this procedure could have a detrimental effect on the
price or volume of the security so far as a Fund is concerned. In other cases
it is possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to a Fund.
During the fiscal years ended December 31, 1996, 1995 and 1994, the Trust
paid brokerage commissions totaling $2,594,403, $1,525,000 and $672,000,
respectively.
As of December 31, 1996, no Fund owned any securities issued by its regular
broker-dealers.
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, 1996 and 1995 were 141.19% and 188.11%,
respectively. These rates exceed the anticipated portfolio turnover rate for
Templeton Bond Fund as a result of changing interest rates and currency
exposure considerations.
Summary of Code of Ethics. 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.
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.
Money Market Fund. 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.
For the purpose of determining the aggregate net assets of a Fund cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued, and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on NASDAQ for which market
quotations are readily available are valued at the last quoted sale price of
the day or, if there is no such reported sale, within the range of the most
recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices.
Portfolio securities which are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market as determined by the Investment Managers.
Trading in securities on European and Far Eastern exchanges and
over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of
European or Far Eastern securities generally, or in a particular country or
countries, may not take place on every New York business day. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and on which the Funds' net asset values are not calculated.
The Funds calculate net asset value per share, and therefore effect sales,
redemptions and repurchases of their shares, as of the close of the NYSE once
on each day on which the Exchange is open. Such calculation does not take
place contemporaneously with the determination of the prices of many of the
portfolios securities used in such calculation and if events occur which
materially affect the value of those foreign securities, they will be valued
at fair market value as determined by the management and approved in good
faith by the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities and Money
Market Instruments is substantially completed each day at various times prior
to the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of each class is determined as of such times.
Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange that will not be reflected in the computation of the Net Asset Value
of each class. If events materially affecting the values of these securities
occur during such period, then the securities will be valued at their fair
value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board of Trustees, a Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
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 of the Trust, except for the Money Market Fund, 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 provisions 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. All other 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 years. 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.
PERFORMANCE INFORMATION
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation be accompanied by certain standardized
performance information computed as required by the SEC. On May 1, 1997, each
Fund (except the Money Fund) began offering Class 2 shares and renamed its
existing shares as Class 1 shares. Any Class 2 performance shown for the
periods prior to May 1, 1997 represents the historical results of Class 1
Shares. Performance of Class 2 shares for the periods after May 1, 1997
reflects Class 2's higher annual fees and expenses resulting from its Rule
12b-1 plan. Historical performance data for Class 2 will generally not be
restated to include 12b-1 fees, although the Trust may restate these figures
consistent with SEC rules. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
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
6
Yield = 2 [(1 + a-b) - 1]
-------
cd
where:
a = dividends 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, 1996, the 7-day annualized yield
of Money Market Fund was 4.73% and the effective yield of Money Market Fund
was 4.85%.
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
indicated periods ended December 31, 1996:
<TABLE>
<CAPTION>
Fund 1 Year Period 5 Year Period Since Inception
<S> <C> <C> <C> <C>
Money Market Fund ....................... 4.99% 3.86% 5.09%1
Bond Fund - Class I...................... 9.45% 7.07% 8.02%1
Stock Fund - Class I .................... 22.48% 14.45% 13.47%1
Asset Allocation Fund - Class I ......... 18.93% 14.01% 12.30%1
International Fund - Class I ............ 24.04% N/A 15.28%2
Developing Markets Fund - Class I ....... N/A N/A -5.70%3
</TABLE>
1Since inception on August 31, 1988
2Since inception on May 1, 1992
3Since inception on March 4, 1996. Aggregate total return represents the
change in value of an investment over the indicated period. Since the fund
has existed for less than one year, average annual total returns are not
provided.
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) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
(14) 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."
**Sir John Templeton sold the Templeton organization to Franklin Resources,
Inc. in October 1992 and resigned from the Trust's Board on April 15, 1995.
He is no longer involved with the investment management process.
FINANCIAL STATEMENTS
The audited financial statements contained in the Trust's Annual Report to
Shareholders dated December 31, 1996, including the auditors' report, are
incorporated herein by reference. These financial statements do not include
information for Class 2, as Class 2 shares were not publicly offered prior to
the date of this SAI.
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 stock rated "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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o 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.
TVPSF SAI 05/97
Semi Annual
Report
JUNE 30, 1997
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights
PER SHARE OPERATING PERFORMANCE - CLASS 1
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31
JUNE 30, 1997 ------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
---------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $22.88 $20.83 $16.94 $17.53 $13.33 $12.72
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Income from investment operations:
Net investment income.................. .36 .41 .40 .26 .23 .25
Net realized and unrealized gain
(loss)............................... 2.81 3.88 3.80 (.64) 4.23 .64
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Total from investment operations........... 3.17 4.29 4.20 (.38) 4.46 .89
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Distributions:
Dividends from net investment income... (.40) (.40) (.27) (.21) (.25) (.28)
Distributions from net realized
gains................................ (1.87) (1.84) (.04) -- (.01) --
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Total distributions........................ (2.27) (2.24) (.31) (.21) (.26) (.28)
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Change in net asset value.................. .90 2.05 3.89 (.59) 4.20 .61
-------- ----- --- ----- --- ----- --- ----- --- ----- ---
Net asset value, end of period............. $23.78 $22.88 $20.83 $16.94 $17.53 $13.33
======== ======== ======== ======== ======== ========
TOTAL RETURN*.............................. 14.73% 22.48% 25.24% (2.20)% 34.00% 7.12%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of period (000)........... . $767,571 $644,366 $498,777 $378,849 $298,392 $166,219
Ratio of expenses to average net assets.... .73%** .65% .66% .73% .73% .75%
Ratio of net investment income to average
net assets............................... 3.40%** 2.06% 2.18% 1.81% 1.88% 2.36%
Portfolio turnover rate.................... 15.43% 23.40% 33.93% 5.10% 4.88% 8.10%
Average commission rate paid (per share)... $.0084 $.0090
</TABLE>
*Total return does not include deductions at the Fund or contract level for cost
of insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
annuity contract for which the Fund serves as an underlying investment vehicle.
Not annualized for periods of less than one year.
**Annualized.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights (continued)
PER SHARE OPERATING PERFORMANCE - CLASS 2
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 1, 1997+
THROUGH
JUNE 30, 1997
(UNAUDITED)
--------------
<S> <C>
Net asset value, beginning of period............................ $21.51
---------
Income from investment operations:
Net investment income....................................... .07
Net realized and unrealized gain............................ 2.20
---------
Total from investment operations................................ 2.27
---------
Net asset value, end of period.................................. $23.78
=========
TOTAL RETURN*................................................... 10.55%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of period (000)................................. $3,511
Ratio of expenses to average net assets......................... 1.16%**
Ratio of net investment income to average net assets............ 3.91%**
Portfolio turnover rate......................................... 15.43%
Average commission rate paid (per share)........................ $.0084
</TABLE>
*Total return does not include deductions at the Fund or contract level for cost
of insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
annuity contract for which the Fund serves as an underlying investment vehicle.
Not annualized for periods of less than one year.
**Annualized.
+Commencement of offering of sales.
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INDUSTRY ISSUE SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 89.6%
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp. .................................. 94,000 $ 8,193,526
------------
AUTOMOBILES 3.3%
Ciadea SA.................................... 1,296,500 5,575,786
Fiat SpA..................................... 2,058,000 7,399,306
Ford Motor Co. .............................. 130,000 4,907,500
Volvo AB, B.................................. 290,500 7,773,706
------------
25,656,298
------------
BANKING 8.7%
Banco Bilbao Vizcaya......................... 73,200 5,946,413
Banco Bradesco SA BBD, ADR................... 659,800 6,649,789
Banque Nationale de Paris.................... 181,204 7,468,070
Banque Nationale de Paris, ADR, 144A......... 10,600 436,864
CS Holdings, br. ............................ 40,000 5,135,228
Deutsche Bank AG............................. 128,000 7,516,027
HSBC Holdings PLC............................ 466,562 14,031,849
National Australia Bank Ltd. ................ 332,376 4,760,705
* Philippine National Bank..................... 815,925 5,537,253
PT Bank Bali, fgn. .......................... 850,500 2,273,129
Unidanmark AS, A............................. 125,900 7,072,501
------------
66,827,828
------------
BROADCASTING & PUBLISHING 0.7%
News Corp. Ltd. ............................. 96,667 463,475
News Corp. Ltd., ADR......................... 260,000 5,005,000
------------
5,468,475
------------
BUILDING MATERIALS & COMPONENTS 2.1%
Cie de Saint Gobain.......................... 52,600 7,670,666
Pioneer International Ltd. .................. 2,273,600 8,789,381
------------
16,460,047
------------
BUSINESS & PUBLIC SERVICES 2.4%
Lex Service PLC.............................. 1,250,000 7,837,349
Waste Management Inc. ....................... 150,000 4,818,750
Wheelabrator Technologies Inc. .............. 370,000 5,711,875
------------
18,367,974
------------
CHEMICALS 2.7%
Akzo Nobel NV................................ 65,000 8,907,739
Rhone-Poulenc SA, A.......................... 292,716 11,954,301
------------
20,862,040
------------
DATA PROCESSING & REPRODUCTION 2.2%
* Bay Networks Inc............................. 217,000 5,764,063
* Newbridge Networks Corp. .................... 260,000 11,310,000
------------
17,074,063
------------
ELECTRICAL & ELECTRONICS 5.2%
Alcatel Alsthom SA........................... 129,835 16,260,582
* DSC Communications Corp. .................... 338,600 7,533,850
Hitachi Ltd. ................................ 274,000 3,060,117
Motorola Inc. ............................... 123,700 9,401,200
Scitex Corp. Ltd. ........................... 461,400 4,066,088
------------
40,321,837
------------
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC COMPONENTS & INSTRUMENTS 2.1%
BICC......................................... 1,400,000 $ 4,114,973
Intel Corp. ................................. 87,300 12,380,231
------------
16,495,204
------------
ENERGY SOURCES 2.7%
Societe Elf Aquitane SA...................... 92,520 9,981,398
Total SA, B.................................. 97,135 9,818,128
Transportadora de Gas del Sur SA, ADR, B..... 77,700 971,250
------------
20,770,776
------------
FINANCIAL SERVICES 2.9%
Axa SA....................................... 110,830 6,893,046
Federal National Mortgage Association ....... 353,600 15,425,800
------------
22,318,846
------------
FOOD & HOUSEHOLD PRODUCTS 1.7%
Burns Philp & Co. Ltd. ...................... 3,177,503 5,901,948
Oshawa Group Ltd. ........................... 454,900 6,951,870
------------
12,853,818
------------
FOREST PRODUCTS & PAPER 3.4%
* Asia Pacific Resources International, A...... 680,000 3,315,000
Assidomaen AB................................ 150,000 4,266,046
Carter Holt Harvey Ltd. ..................... 1,239,126 3,206,791
Enso Gutzeit OY, R........................... 463,300 4,282,586
Fletcher Challenge Ltd. Forestry Division.... 5,226,124 7,596,678
Stora Kopparbergs Bergslags AB, B............ 225,000 3,664,921
------------
26,332,022
------------
HEALTH & PERSONAL CARE 4.0%
Astra AB, A.................................. 266,664 4,964,077
Astra AB, B.................................. 338,664 5,976,037
Novartis A.G................................. 6,933 11,079,508
Nycomed ASA, A............................... 616,200 9,080,063
------------
31,099,685
------------
INDUSTRIAL COMPONENTS 4.0%
BTR PLC...................................... 1,721,500 5,891,326
Exide Corp................................... 349,100 7,658,381
Goodyear Tire & Rubber Co. .................. 110,000 6,964,375
* Graenges AB.................................. 138,000 1,828,582
Madeco Manufacturera de Cobre SA, ADR........ 263,500 6,455,750
Yamato Kogyo Co. Ltd. ....................... 214,000 2,109,938
------------
30,908,352
------------
INSURANCE 7.5%
GIO Australia Holdings Ltd. ................. 3,041,605 9,415,881
HIH Winterthur International Holdings
Ltd. ........................................ 1,659,296 4,009,111
Ing Groep NV................................. 228,461 10,533,252
Partnerre Ltd. .............................. 209,000 7,968,125
Reliastar Financial Corp. ................... 144,000 10,530,000
Torchmark Corp. ............................. 60,000 4,275,000
Zuerich Versicherung, new.................... 28,400 11,297,775
------------
58,029,144
------------
LEISURE & TOURISM 1.7%
Kuoni Reisen Holding AG, B................... 3,700 12,666,895
------------
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING 2.3%
David Jones Ltd. ............................ 104,000 $ 145,271
Home Depot Inc. ............................. 110,000 7,583,125
House of Fraser PLC.......................... 1,901,700 5,003,724
Macintosh NV................................. 143,523 2,858,907
Storehouse PLC............................... 548,000 1,720,228
------------
17,311,255
------------
METALS & MINING 2.4%
Boehler Uddeholm AG.......................... 86,000 6,669,059
Eramet SA.................................... 127,200 5,865,741
Usinas Siderugicas de Minas Gerais, Sponsored
ADR.......................................... 516,500 5,681,500
------------
18,216,300
------------
MULTI-INDUSTRY 4.5%
DESC SA, B................................... 1,009,000 7,368,673
DESC SA, C................................... 10,090 72,797
Hutchison Whampoa Ltd........................ 865,600 7,485,860
Inchcape PLC................................. 1,619,100 7,630,523
Jardine Matheson Holdings Ltd................ 525,369 3,730,120
Jardine Strategic Holdings Ltd............... 350,048 1,323,181
* Jardine Strategic Holdings Ltd., wts......... 38,894 15,363
La Cemento Nacional CA, GDR.................. 400 83,200
La Cemento Nacional CA, GDR, 144A............ 4,600 956,800
Metro Pacific Corp. MDI...................... 23,184,000 5,010,191
Swire Pacific Ltd., B........................ 353,000 535,380
------------
34,212,088
------------
REAL ESTATE 1.9%
National Health Investors Inc................ 203,500 7,987,375
Summit Properties Inc., REIT................. 337,000 6,950,625
------------
14,938,000
------------
TELECOMMUNICATIONS 9.6%
Jasmine International Public Co. Ltd.,
fgn.......................................... 4,133,000 3,669,523
Nokia AB, A.................................. 102,100 7,707,515
SPT Telecom AS............................... 52,600 5,514,987
STET (Sta Finanziaria Telefonica Torino)
SpA.......................................... 2,180,000 12,701,059
Telecom Italia SpA........................... 3,610,800 11,590,511
Telefonica de Argentina SA, B, ADR........... 291,000 10,075,875
Telefonica de Espana SA...................... 421,500 12,185,884
Telefonos de Mexico SA, L, ADR............... 221,800 10,590,950
------------
74,036,304
------------
TEXTILES & APPAREL 1.0%
Dawson International PLC..................... 3,450,000 4,107,895
* Fruit of the Loom Inc., A.................... 125,000 3,875,000
------------
7,982,895
------------
TRANSPORTATION 3.2%
Air New Zealand Ltd., B...................... 2,955,000 9,032,339
Helikopter Services Group ASA................ 585,000 7,502,865
Koninklijke Nedlloyd NV...................... 291,500 8,420,220
------------
24,955,424
------------
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 6.3%
* CEZ.......................................... 100,000 $ 2,759,961
Compania Sevillana de Electricidad........... 275,921 2,846,284
Endesa-Empresa Nacional de Electricidad SA... 115,000 9,654,225
Evn Energie-Versorgung Niederoesterreich
AG........................................... 63,600 8,194,072
Hong Kong Electric Holdings Ltd.............. 1,974,500 7,951,725
Iberdrola SA................................. 706,000 8,911,843
VEBA AG...................................... 140,000 7,907,564
------------
48,225,674
------------
WHOLESALE & INTERNATIONAL TRADE 0.0%
Inchcape Bhd., fgn........................... 86,000 309,785
------------
TOTAL COMMON STOCKS (COST
$506,283,645)................................ 690,894,555
------------
PREFERRED STOCKS 2.9%
Jardine Strategic Holdings Ltd., 7.50%,
conv......................................... 2,831,000 3,496,285
News Corp. Ltd., pfd......................... 250,067 985,601
News Corp. Ltd., pfd., ADR................... 130,000 2,031,250
Telebras-Telecomunicacoes Brasileiras SA,
pfd.......................................... 102,000,000 15,529,765
------------
TOTAL PREFERRED STOCKS (COST $7,665,172)..... 22,042,901
------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY
--------------
<S> <C> <C> <C> <C>
SHORT TERM OBLIGATIONS (COST
$71,156,098) 9.2%
U.S. Treasury Bills, 4.68% to 5.14% with
maturities to 9/18/97...................... U.S. 71,563,000 71,159,767
------------
TOTAL INVESTMENTS (COST
$585,104,915) 101.7%........................ 784,097,223
OTHER ASSETS, LESS LIABILITIES (1.7%)....... (13,014,691)
------------
TOTAL NET ASSETS 100.0%..................... $771,082,532
============
</TABLE>
*Non-income producing.
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $585,104,915) $784,097,223
Receivables:
Fund shares sold 399,259
Dividends and interest 2,893,562
------------
Total assets 787,390,044
------------
Liabilities:
Payables:
Investment securities purchased 15,445,779
Accrued expenses 861,733
------------
Total liabilities 16,307,512
------------
Net assets, at value $771,082,532
============
Net assets consist of:
Undistributed net investment income $ 11,953,763
Net unrealized appreciation 198,992,308
Accumulated net realized gain 43,657,579
Net capital paid in on shares of
beneficial interest 516,478,882
------------
Net assets, at value $771,082,532
============
Class 1
Shares outstanding 32,273,292
============
Net asset value per share
($767,571,347 divided
by 32,273,292) $ 23.78
============
Class 2
Shares outstanding 147,672
============
Net asset value per share ($3,511,185
divided by 147,672) $ 23.78
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of $1,247,612 foreign
taxes withheld)
Dividends $13,084,380
Interest 1,165,111
-----------
Total Income $14,249,491
Expenses:
Management fees (Note 3) 1,886,307
Administrative fees (Note 3) 349,499
Distribution fees (Note 3)
Class 2 707
Custodian fees 179,000
Reports to shareholders 59,621
Audit fees 14,200
Legal fees (Note 3) 2,500
Trustees' fees and expenses 12,750
Other 450
-----------
Total expenses 2,505,034
-----------
Net investment income 11,744,457
Realized and unrealized gain
(loss):
Net realized gain (loss) on:
Investments 44,240,073
Foreign currency transactions (302,161)
-----------
43,937,912
Net unrealized appreciation on
investments 41,683,362
-----------
Net realized and unrealized gain 85,621,274
-----------
Net increase in net assets
resulting
from operations $97,365,731
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income........................................................ $ 11,744,457 $ 11,586,443
Net realized gain on investment and foreign currency transactions............ 43,937,912 53,364,032
Net unrealized appreciation.................................................. 41,683,362 50,486,029
---------------- -----------------
Net increase in net assets resulting from operations...................... 97,365,731 115,436,504
---------------- -----------------
Distributions to shareholders:
From net investment income
Class 1..................................................................... (11,299,102) (9,701,533)
From net realized gain
Class 1..................................................................... (53,491,950) (44,505,784)
Fund share transactions (Note 2)
Class 1..................................................................... 90,765,995 84,359,449
Class 2..................................................................... 3,376,093 --
---------------- -----------------
Net increase in net assets................................................ 126,716,767 145,588,636
---------------- -----------------
Net assets:
Beginning of period........................................................... 644,365,765 498,777,129
---------------- -----------------
End of period................................................................. $771,082,532 $ 644,365,765
============== ===============
</TABLE>
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Variable Products Series Fund (the Trust) is registered under the
Investment Company Act of 1940 as an open-end diversified investment company
consisting of six series (the Funds). The Funds and their investment policies
are as follows:
Templeton Stock Fund seeks capital growth through a policy of investing
primarily in common stocks issued by companies, large and small, in various
nations throughout the world. Templeton International Fund seeks long-term
capital growth through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United States. Templeton
Developing Markets Fund seeks long-term capital appreciation by investing
primarily in equity securities of issuers in countries having developing
markets. Templeton Asset Allocation Fund seeks a high level of total return
through a flexible policy of investing in stocks of companies in any nation,
debt obligations of companies and governments of any nation, and money market
instruments. Templeton Bond Fund seeks high current income through a flexible
policy of investing primarily in the debt securities of companies, governments
and government agencies of various nations throughout the world. Templeton Money
Market Fund seeks current income, stability of principal, and liquidity by
investing in money market instruments with maturities not exceeding 397 days.
The following summarizes the Funds' significant accounting policies.
a. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees. Securities
held by Templeton Money Market Fund are valued at amortized cost which
approximates value.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the recorded amounts of
dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Funds. Interest income and estimated expenses are accrued
daily. Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
e. REPURCHASE AGREEMENTS:
The Funds may enter into repurchase agreements, which are accounted for as a
loan by the Fund to the seller, collateralized by securities which are delivered
to the Funds' custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Funds, with the value of the underlying securities marked-to-
market daily to maintain coverage of at least 100%. At June 30, 1997, all
outstanding repurchase agreements held by the Fund had been entered into on that
date.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
g. INDEXED SECURITIES:
The Asset Allocation Fund and Bond Fund may invest in debt instruments in which
the principal and/or interest is dependent on other factors such as yield
curves, currency exchange rates or commodity prices. The Fund's objective in
holding these securities, commonly called indexed securities or structured
notes, is to tailor the Fund's investments to the specific risk and returns it
wishes to assume while avoiding unwanted risk or change in the Fund's exposure
to a particular foreign exchange rate or the spread between two foreign exchange
rates.
2. BENEFICIAL SHARES
Effective May 1, 1997, Templeton Stock Fund, Templeton International Fund,
Templeton Developing Markets Fund, Templeton Asset Allocation Fund and Templeton
Bond Fund offer two classes of shares: Class 1 and Class 2. Outstanding shares
before that date were designated as Class 1 shares. The shares have the same
rights except for their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At June 30, 1997, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Funds' shares were as
follows:
<TABLE>
<CAPTION>
TEMPLETON STOCK FUND - CLASS 1
-------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 2,499,312 $ 56,102,190 4,324,078 $ 89,638,950
Shares issued on reinvestment of distributions..................... 2,970,704 64,791,053 2,791,314 54,207,317
Shares redeemed.................................................... (1,359,232) (30,127,248) (2,892,776) (59,486,818)
---------- ------------ ---------- ------------
Net increase....................................................... 4,110,784 $ 90,765,995 4,222,616 $ 84,359,449
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON STOCK
FUND - CLASS 2
--------------------------
FOR THE PERIOD
MAY 1, 1997 THROUGH
JUNE 30, 1997
--------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
Shares sold........................................................ 149,133 $3,409,140
Shares redeemed.................................................... (1,461) (33,047)
---------- ------------
Net increase....................................................... 147,672 $3,376,093
========== ============
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL FUND - CLASS 1
-------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 7,201,931 $135,201,804 15,869,480 $256,826,546
Shares issued on reinvestment of distributions..................... 1,502,618 27,527,954 524,440 8,134,054
Shares redeemed.................................................... (2,027,297) (38,045,425) (2,621,355) (43,182,196)
---------- ------------ ---------- ------------
Net increase....................................................... 6,677,252 $124,684,333 13,772,565 $221,778,404
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL
FUND - CLASS 2
--------------------------
FOR THE PERIOD
MAY 1, 1997 THROUGH
JUNE 30, 1997
--------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 131,923 $2,560,678
Shares redeemed.................................................... (156) (3,021)
---------- ------------
Net increase....................................................... 131,767 $2,557,657
========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING MARKETS FUND - CLASS 1
-------------------------------------------------------------
FOR THE PERIOD
SIX MONTHS ENDED MARCH 4, 1996 THROUGH
JUNE 30, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 8,948,411 $88,700,666 7,686,505 $73,253,158
Shares issued on reinvestment of distributions..................... 66,964 696,425 -- --
Shares redeemed.................................................... (196,031) (1,953,250) (25,642) (238,368)
---------- ------------ ---------- ------------
Net increase....................................................... 8,819,344 $87,443,841 7,660,863 $73,014,790
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
MARKETS FUND - CLASS 2
--------------------------
FOR THE PERIOD
MAY 1, 1997 THROUGH
JUNE 30, 1997
--------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 323,834 $3,182,045
Shares redeemed.................................................... (12,065) (117,579)
---------- ------------
Net increase....................................................... 311,769 $3,064,466
========== ============
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
<TABLE>
<CAPTION>
TEMPLETON ASSET ALLOCATION FUND - CLASS 1
-------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 2,871,422 $60,381,235 5,028,891 $96,250,257
Shares issued on reinvestment of distributions..................... 2,407,943 49,459,143 1,240,484 22,862,120
Shares redeemed.................................................... (591,253) (12,378,510) (1,580,553) (30,446,888)
---------- ------------ ---------- ------------
Net increase....................................................... 4,688,112 $97,461,868 4,688,822 $88,665,489
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON ASSET
ALLOCATION FUND - CLASS 2
--------------------------
FOR THE PERIOD
MAY 1, 1997 THROUGH
JUNE 30, 1997
--------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C> <C> <C>
Shares sold........................................................ 102,268 $2,211,427
Shares redeemed.................................................... (1,727) (37,268)
---------- ------------
Net increase....................................................... 100,541 $2,174,159
========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON BOND FUND - CLASS 1
---------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 1996
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold...................................................... 221,237 $ 2,440,743 412,304 $ 4,557,713
Shares issued on reinvestment of distributions................... 225,352 2,415,770 323,533 3,413,281
Shares redeemed.................................................. (311,895) (3,436,722) (578,367) (6,386,418)
---------- ------------ ---------- ------------
Net increase..................................................... 134,694 $ 1,419,791 157,470 $ 1,584,576
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON MONEY MARKET FUND
---------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 1996
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold...................................................... 17,267,228 $ 17,267,228 35,278,602 $ 35,278,602
Shares issued on reinvestment of distributions................... 348,951 348,951 708,580 708,580
Shares redeemed.................................................. (20,182,574) (20,182,574) (42,624,735) (42,624,735)
---------- ------------ ---------- ------------
Net decrease..................................................... (2,566,395) $ (2,566,395) (6,637,553) $ (6,637,553)
========== ============ ========== ============
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton
Investment Councel, Inc. (TICI), the investment manager for all of the funds
except Templeton Developing Markets Fund and Templeton Asset Management Ltd.
(TAML), the investment manager for Templeton Developing Markets Fund. In
addition, certain officers of the Trust are also officers or directors of
Templeton Funds Annuity Company (TFAC) and Franklin Templeton Distributors Inc.
(FTD), the funds' administrative manager and principal underwriter,
respectively.
Effective May 1, 1997, Templeton Stock and International Funds each pay a
monthly investment management fee, equal on an annual basis, to 0.75% of their
average daily net assets up to $200 million, 0.675% of such net assets from $200
million up to $1.3 billion, and 0.60% of such net assets in excess of $1.3
billion, and Templeton Asset Allocation Fund pays a monthly investment
management fee, equal on an annual basis, to 0.65% of its average daily net
assets up to $200 million, 0.585% of such net assets from $200 million up to
$1.3 billion, and 0.52% of such net assets in excess of $1.3 billion. Prior to
May 1, 1997, Templeton Stock, International and Asset Allocation Funds each paid
a monthly investment management fee, equal on an annual
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
basis, to 0.50% of their average daily net assets up to $200 million, 0.45% of
such net assets from $200 million up to $1.3 billion, and 0.40% of such net
assets in excess of $1.3 billion. Templeton Bond Fund pays a monthly investment
management fee, equal on an annual basis, to 0.50% of its average daily net
assets up to $200 million, 0.45% of such net assets from $200 million up to $1.3
billion, and 0.40% of such net assets in excess of $1.3 billion. Templeton
Developing Markets Fund pays a monthly investment management fee, equal on an
annual basis to 1.25% of its average daily net assets during the year. Templeton
Money Market Fund pays a monthly investment management fee equal on an annual
basis to 0.35% of its average daily net assets up to $200 million, 0.30% of such
net assets from $200 million up to $1.3 billion, and 0.25% of such net assets in
excess of $1.3 billion. Each Fund pays its allocated share of an administrative
fee to TFAC equivalent on an annual basis to 0.15% of the combined average daily
net assets of the Funds, reduced to 0.135% of such net assets in excess of $200
million, 0.10% of such net assets in excess of $700 million and 0.075% of such
net assets in excess of $1.2 billion.
During the period ended June 30, 1997, legal fees of $14,400 were paid to a law
firm in which an officer of the Trust is a partner.
Templeton Stock, International, Asset Allocation and Developing Markets Funds
reimburse FTD up to 0.25% and Bond Fund reimburses FTD up to 0.15% per year of
their average daily net assets of Class 2 shares, for costs incurred in
marketing the Funds' shares.
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 1997, were as follows:
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON DEVELOPING ASSET
TEMPLETON INTERNATIONAL MARKETS ALLOCATION TEMPLETON
STOCK FUND FUND FUND FUND BOND FUND
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Purchases..................................... $ 108,745,087 $ 200,944,769 $ 73,346,167 $ 228,014,566 $ 35,458,494
============ ============ =========== ============ ===========
Sales......................................... $ 99,871,220 $ 86,648,432 $ 4,515,265 $ 162,230,786 $ 35,951,319
============ ============ =========== ============ ===========
</TABLE>
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Templeton International, Asset Allocation, and Bond Funds have been parties to
financial instruments with off-balance sheet risks, primarily forward exchange
contracts, in order to minimize the impact on the Funds from adverse changes in
the relationship between the US Dollar and foreign currencies and interest
rates. These instruments involve market risks in excess of the amount recognized
on the Statements of Assets and Liabilities. Some of these risks have been
minimized by offsetting contracts. Risks arise from the possible inability of
counterparties to meet the terms of their contracts, future movement in currency
values and interest rates and contract positions that are not exact offsets. The
contract amount indicates the extent of the Funds' involvement in such
contracts.
The Funds may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
As of June 30, 1997, Templeton Asset Allocation Fund had the following forward
foreign exchange contracts outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ---------------------------------------------------------------------------- ------------ ---------- -----------
<C> <S> <C> <C> <C> <C> <C>
1,251,000 Great British pound............................................ U.S. $ 2,029,757 8/12/97 U.S. $ 51,793
----------- -----------
-----------
CONTRACTS TO SELL:
40,635,000 German mark.................................................... U.S. $24,107,862 7/14/97 936,168
34,300,000 German mark.................................................... 20,105,948 9/15/97 325,056
----------- -----------
U.S. $44,213,810 1,261,224
===========
Net unrealized gain on offsetting forward exchange contracts... 324,532
-----------
Unrealized gain on forward exchange contracts.................. 1,637,549
-----------
CONTRACTS TO BUY:
34,860,000 German mark.................................................... U.S. $20,506,040 7/14/97 (494,513)
938,700 Great British pound............................................ 1,562,185 8/12/97 (1,022)
----------- -----------
U.S. $22,068,225 (495,535)
=========== -----------
CONTRACTS TO SELL:
3,129,000 Great British pound............................................ U.S. $ 5,029,555 8/12/97 (174,321)
2,100,000 Australian dollar.............................................. 1,582,831 9/26/97 (4,491)
----------- -----------
U.S. $ 6,612,386 (178,812)
=========== -----------
Net unrealized loss on offsetting forward exchange contracts... (635,710)
Unrealized loss on forward exchange contracts.................. (1,310,057)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $ 327,492
===========
</TABLE>
As of June 30, 1997, Templeton Bond Fund had the following forward foreign
exchange contracts outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ---------------------------------------------------------------------------- ------------ ---------- -----------
<C> <S> <C> <C> <C> <C> <C>
2,815,000 German mark.................................................... U.S. $ 1,681,249 7/14/97 U.S. $ 65,287
7,500,000 German mark.................................................... 4,394,462 9/15/97 69,194
----------- -----------
U.S. 6,075,711 134,481
===========
Net unrealized gain on offsetting forward exchange contracts... 566,957
-----------
Unrealized gain on forward exchange contracts.................. 701,438
-----------
CONTRACTS TO SELL:
234,000 Great British pound............................................ U.S. $ 377,096 8/12/97 (13,070)
435,000 Australian dollar.............................................. 327,872 9/29/97 (930)
----------- -----------
U.S. 704,968 (14,000)
=========== -----------
Net unrealized loss on offsetting forward exchange contracts... (559,499)
Unrealized loss on forward exchange contracts.................. (573,499)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $ 127,939
===========
</TABLE>
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (unaudited) (continued)
6. INCOME TAXES
At December 31, 1996, Templeton Bond Fund had tax basis capital losses of
$2,039,250 which may be carried over to offset future capital gains. Such losses
expire in 2002.
The cost of securities for federal income tax purposes is the same as that shown
in the investment portfolios. At June 30, 1997, the net unrealized appreciation
(depreciation) based on the cost of investments for income tax purposes was as
follows:
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON DEVELOPING ASSET
TEMPLETON INTERNATIONAL MARKETS ALLOCATION TEMPLETON
STOCK FUND FUND FUND FUND BOND FUND
------------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Unrealized appreciation....................... 220,739,001 199,971,382 15,459,249 174,227,722 206,826
Unrealized depreciation....................... (21,746,693) (14,803,493) (13,730,118) (13,374,844) (472,740)
------------ ------------ ----------- ------------ -----------
Net unrealized appreciation (depreciation).... $ 198,992,308 $ 185,167,889 $ 1,729,131 $ 160,852,878 $(265,914)
============ ============ =========== ============ ===========
</TABLE>
<PAGE>
TEMPLETON VARIABLE
ANNUITY FUND - - 1996 ANNUAL REPORT
YOUR FUND'S OBJECTIVE:
The Templeton Variable Annuity Fund seeks long-term capital growth through a
flexible policy of investing primarily in stocks and debt obligations of
companies and governments of any nation.
February 18, 1997
Dear Contract Owner:
We are pleased to bring you the annual report of the Templeton Variable Annuity
Fund for the fiscal year ended December 31, 1996. The Fund delivered a total
return of 24.71% for the 12 months under review, as discussed in the Performance
Summary on page 5. Its benchmark, the unmanaged Morgan Stanley Capital
International(R)(1) (MSCI) World Index posted a total return of 14.00% for the
same period. The Fund's strong performance versus its benchmark was in part the
result of our bottom-up, value style of investing and relative overweighting in
markets that performed exceptionally well during the period. You should keep in
mind that Fund performance does not reflect expenses associated with the
variable contract; had those expenses been included, performance would have been
lower.
During 1996, many U.S. stocks rose in value due to subdued inflation, moderate
economic growth and strong corporate earnings. The share price of two of
1. A registered trademark of Morgan Stanley and Co., Inc. Total return
includes reinvested dividends. One cannot invest directly in an index.
TEMPLETON VARIABLE ANNUITY FUND
Geographic Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART]
Europe 47.6%
North America 22.9%
Asia 10.2%
Australia/New Zealand 10.1%
Latin America 7.4%
Middle East/Africa 0.7%
Short-Term Obligations &
Other Net Assets 1.1%
our largest holdings, Fruit of the Loom Inc. and Federal National Mortgage
Assn., appreciated 55.4% and 20.0%, respectively, and had a positive impact on
the Fund's performance. The Fund also benefited from the strength of the banking
sector, prompting us to sell our holdings of BankAmerica Corp., NationsBank
Corp., and Barnett Banks Inc. at a profit. We realized additional gains by
selling our shares of Columbia Healthcare Corp. and Aetna Life & Casualty Co. As
a result of our sales of domestic equities, our exposure to the U.S. decreased
from 31.8% of total net assets on December 31, 1995 to 20.4% at the end of the
reporting period.
Most European stocks performed well during the fiscal year. The equity markets
of France, Norway, Spain and Sweden delivered impressive returns, helping the
Fund's performance because, compared with the MSCI World Index, we were
overweighted in all four countries. Among the Fund's ten largest holdings, the
share price of Telefonica de Espana SA appreciated more than 65% and
Rhone-Poulenc SA 59.5%. Although the Austrian stock market turned in a
lackluster performance compared with other European markets, the share price of
one of our holdings, Austrian utilities company Evn Energie-Versorgung
Niederoesterreich AG, rose 31.7% during the period. This is a good example of
how our bottom-up, value style of investing can often help us discover
TEMPLETON VARIABLE ANNUITY FUND
Top 10 Holdings on 12/31/96
Based on Total Net Assets
% of Total
Company, Industry, Country Net Assets
News Corp. Ltd.
Broadcasting, Australia 3.3%
Federal National Mortgage Assn.
Financial Services, U.S. 2.9%
Alcatel Alsthom SA
Electrical & Electronics, France 2.1%
Telefonica de Espana SA, ADR
Telecommunications, Spain 1.9%
Evn Energie-Versorgung Niederoesterreich AG
Utilities - Electrical & Gas, Austria 1.9%
VEBA AG
Utilities - Electrical & Gas, Germany 1.8%
Rhone-Poulenc SA, A
Chemicals, France 1.8%
Fruit of the Loom Inc., A
Textiles & Apparel, U.S. 1.8%
Kuoni Reisen Holding AG, B
Leisure & Tourism, Switzerland 1.8%
Akzo Nobel NV
Chemicals, Netherlands 1.7%
For a complete list of portfolio holdings, please see page 8 of this report.
companies that tend to perform well regardless of the direction of the overall
markets.
Although some Asian stock markets performed poorly in 1996 because of slowing
economies and weakening currencies, Hong Kong's equity market gained 37.5% as
concerns about China's takeover in 1997 faded, and investors focused on the
growth prospects of Hong Kong companies with established operations in China(2)
During the period, our holdings of Consolidated Electric Power Asia Ltd.
provided a significant gain for the Fund.
Latin American equity markets rebounded strongly in 1996 as a result of improved
economic fundamentals and renewed interest from foreign investors. The
tele-communications and electric utility industries performed well, and the
share price of one of the Fund's holdings, Telebras-Telecomunicacoes Brasileiras
SA (Telebras), appreciated nearly 60% during the fiscal year. We believe demand
for utility services will continue to increase, and the expected deregulation of
the Brazilian telephone industry could provide Telebras with strong growth
potential.
2. Price appreciation measured in U.S. dollars, and includes reinvested
dividends.
This discussion reflects the strategies we employed for the Fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
As always, we will strive to build and improve our ability to serve investors
while maintaining the traditional values and principles that have served our
clients well for so long. We appreciate your participation in the Templeton
Variable Annuity Fund and welcome any comments or suggestions you may have.
Sincerely,
/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Variable Annuity Fund
PERFORMANCE SUMMARY
The Templeton Variable Annuity Fund delivered a total return of 24.71% for the
one-year period ended December 31, 1996. Total return represents the change in
the Fund's share price, as measured by net asset value, and includes
reinvestment of dividends and capital gains. It does not include deductions at
the Fund or contract level for cost of insurance charges, premium load,
administrative charges, maintenance fees, premium tax charges, mortality and
expense risk charges or other charges that may be incurred under the variable
annuity contract for which the Fund serves as an underlying investment vehicle.
If they had been included, performance would have been lower. For a complete
description of expenses, including any applicable sales charges, please refer to
the contract prospectus.
The graph on the following page shows how a $10,000 investment in the Fund since
inception has outperformed the unmanaged Morgan Stanley Capital International
(MSCI) World Index.* It also shows how an investment in the Fund over the same
period has kept your purchasing power ahead of inflation, as measured by the
Consumer Price Index (CPI).** Please remember that the Fund's performance
differs from that of an index because an index does not contain cash (the Fund
generally carries a certain percentage of cash at any given time) and includes
no management charges or other expenses. Of course, one cannot invest directly
in an index.
*The Morgan Stanley Capital International (MSCI) World Index includes
approximately 1,500 companies representing the stock markets of 22 countries
including the U.S., Europe, Canada, Australia, New Zealand, and the Far East.
The "average company in the index has a market capitalization of about $3.5
billion.
**The Consumer Price Index is a measure of the average change in prices for a
fixed basket of goods and services regularly bought in the U.S.
[LINE CHART]
TEMPLETON VARIABLE ANNUITY FUND
Inception: 2/16/88
Date Templeton Variable Annuity Fund MSCI World Index CPI
2/16/88 $10,000 $10,000 $10,000
2/29/88 $10,030 2.61% $10,261 0.12% $10,012
3/31/88 $9,890 3.04% $10,573 0.43% $10,055
4/30/88 $9,890 1.28% $10,708 0.52% $10,107
5/31/88 $9,690 -1.98% $10,496 0.34% $10,141
6/30/88 $9,970 -0.12% $10,484 0.43% $10,185
7/31/88 $9,770 1.90% $10,683 0.42% $10,228
8/31/88 $9,730 -5.48% $10,097 0.42% $10,271
9/30/88 $10,170 4.26% $10,527 0.67% $10,340
10/31/88 $10,540 6.67% $11,230 0.33% $10,374
11/30/88 $10,310 3.50% $11,623 0.08% $10,382
12/31/88 $10,371 0.92% $11,730 0.17% $10,400
1/31/89 $11,259 3.64% $12,157 0.50% $10,452
2/28/89 $11,219 -0.61% $12,082 0.41% $10,494
3/31/89 $11,483 -0.62% $12,008 0.58% $10,555
4/30/89 $11,969 2.32% $12,286 0.65% $10,624
5/31/89 $12,020 -2.44% $11,986 0.57% $10,684
6/30/89 $11,989 -1.11% $11,853 0.24% $10,710
7/31/89 $12,993 11.32% $13,195 0.24% $10,736
8/31/89 $13,530 -2.40% $12,878 0.16% $10,753
9/30/89 $13,864 2.84% $13,244 0.32% $10,787
10/31/89 $13,256 -3.32% $12,804 0.48% $10,839
11/30/89 $13,702 4.01% $13,318 0.24% $10,865
12/31/89 $14,053 3.23% $13,748 0.16% $10,883
1/31/90 $13,136 -4.65% $13,109 1.03% $10,995
2/28/90 $13,177 -4.27% $12,549 0.47% $11,046
3/31/90 $13,363 -6.02% $11,794 0.55% $11,107
4/30/90 $13,114 -1.42% $11,626 0.16% $11,125
5/31/90 $14,391 10.55% $12,853 0.23% $11,150
6/30/90 $14,525 -0.70% $12,763 0.54% $11,211
7/31/90 $14,671 0.93% $12,881 0.38% $11,253
8/31/90 $13,239 -9.34% $11,678 0.92% $11,357
9/30/90 $11,963 -10.53% $10,449 0.84% $11,452
10/31/90 $11,900 9.36% $11,426 0.60% $11,521
11/30/90 $12,212 -1.62% $11,241 0.22% $11,546
12/31/90 $12,481 2.11% $11,479 0.00% $11,546
1/31/91 $13,319 3.68% $11,901 0.60% $11,616
2/28/91 $14,220 9.27% $13,004 0.15% $11,633
3/31/91 $14,134 -2.93% $12,623 0.15% $11,650
4/30/91 $14,315 0.80% $12,724 0.15% $11,668
5/31/91 $14,655 2.28% $13,014 0.30% $11,703
6/30/91 $13,805 -6.16% $12,213 0.29% $11,737
7/31/91 $14,804 4.74% $12,791 0.15% $11,754
8/31/91 $15,176 -0.30% $12,753 0.29% $11,789
9/30/91 $15,346 2.64% $13,090 0.44% $11,840
10/31/91 $15,537 1.64% $13,304 0.15% $11,858
11/30/91 $15,112 -4.34% $12,727 0.29% $11,893
12/31/91 $16,610 7.30% $13,656 0.07% $11,901
1/31/92 $16,829 -1.83% $13,406 0.15% $11,919
2/29/92 $17,387 -1.71% $13,177 0.36% $11,962
3/31/92 $16,961 -4.69% $12,559 0.51% $12,023
4/30/92 $17,435 1.41% $12,736 0.14% $12,039
5/31/92 $18,120 4.00% $13,245 0.14% $12,056
6/30/92 $17,723 -3.33% $12,804 0.36% $12,100
7/31/92 $17,822 0.27% $12,839 0.21% $12,125
8/31/92 $17,634 2.45% $13,154 0.28% $12,159
9/30/92 $17,447 -0.90% $13,035 0.28% $12,193
10/31/92 $17,579 -2.69% $12,685 0.35% $12,236
11/30/92 $17,988 1.81% $12,914 0.14% $12,253
12/31/92 $18,311 0.83% $13,021 -0.07% $12,244
1/31/93 $18,702 0.35% $13,067 0.49% $12,304
2/28/93 $19,008 2.39% $13,379 0.35% $12,347
3/31/93 $19,789 5.82% $14,158 0.35% $12,391
4/30/93 $20,095 4.65% $14,816 0.28% $12,425
5/31/93 $20,449 2.32% $15,160 0.14% $12,443
6/30/93 $20,425 -0.82% $15,036 0.14% $12,460
7/31/93 $20,571 2.08% $15,348 0.00% $12,460
8/31/93 $22,245 4.60% $16,054 0.28% $12,495
9/30/93 $22,391 -1.83% $15,761 0.21% $12,521
10/31/93 $23,442 2.77% $16,197 0.41% $12,573
11/30/93 $23,259 -5.64% $15,284 0.07% $12,581
12/31/93 $25,131 4.91% $16,034 0.00% $12,581
1/31/94 $26,522 6.61% $17,094 0.27% $12,615
2/28/94 $25,711 -1.28% $16,875 0.34% $12,658
3/31/94 $24,501 -4.29% $16,151 0.34% $12,701
4/30/94 $24,837 3.11% $16,653 0.14% $12,719
5/31/94 $25,146 0.27% $16,698 0.07% $12,728
6/30/94 $24,300 -0.27% $16,653 0.34% $12,771
7/31/94 $25,468 1.92% $16,973 0.27% $12,806
8/31/94 $26,367 3.02% $17,486 0.40% $12,857
9/30/94 $25,736 -2.61% $17,029 0.27% $12,892
10/31/94 $25,642 2.87% $17,518 0.07% $12,901
11/30/94 $24,555 -4.32% $16,761 0.13% $12,917
12/31/94 $24,099 0.99% $16,927 0.00% $12,917
1/31/95 $23,750 -1.48% $16,677 0.40% $12,969
2/28/95 $24,434 1.48% $16,923 0.40% $13,021
3/31/95 $25,080 4.84% $17,743 0.33% $13,064
4/30/95 $25,989 3.51% $18,365 0.33% $13,107
5/31/95 $26,898 0.87% $18,525 0.20% $13,133
6/30/95 $27,690 -0.01% $18,523 0.20% $13,160
7/31/95 $29,040 5.02% $19,453 0.00% $13,160
8/31/95 $28,776 -2.21% $19,023 0.26% $13,194
9/30/95 $29,670 2.93% $19,581 0.20% $13,220
10/31/95 $28,556 -1.56% $19,275 0.33% $13,264
11/30/95 $29,480 3.49% $19,948 -0.07% $13,255
12/31/95 $30,242 2.94% $20,534 -0.07% $13,245
1/31/96 $31,078 1.83% $20,910 0.59% $13,323
2/29/96 $31,706 0.63% $21,042 0.32% $13,366
3/31/96 $32,774 1.68% $21,395 0.52% $13,436
4/30/96 $33,565 2.37% $21,902 0.39% $13,488
5/31/96 $34,082 0.10% $21,924 0.19% $13,514
6/30/96 $34,615 0.52% $22,038 0.06% $13,522
7/31/96 $32,619 -3.52% $21,263 0.19% $13,547
8/31/96 $33,927 1.17% $21,511 0.19% $13,573
9/30/96 $34,770 3.93% $22,357 0.32% $13,617
10/31/96 $35,218 0.72% $22,518 0.32% $13,660
11/30/96 $37,180 5.62% $23,783 0.19% $13,686
12/31/96 $37,714 -1.58% $23,407 0.00% $13,686
Total Return Index Comparison
$10,000 Investment (2/16/88 - 12/31/96)
*Templeton Variable **MSCI World ***Consumer
Annuity Fund(1) Index(2) Price Index(3)
1. Total return measures the change in the Fund's net asset value over the
period shown, assuming reinvestment of dividends and capital gains. It does not
include any variable annuity contract fees and charges, which are described in
the Performance Summary. Past performance is not predictive of future results.
2. Index is unmanaged and includes reinvested dividends.
3. Source: U.S. Bureau of Labor Statistics.
Periods Ended 12/31/96
Since
Inception
One-Year Five-Year (2/16/88)
Cumulative
Total Return (1) 24.71% 127.05% 277.14%
Average Annual
Total Return (2) 24.71% 17.81% 16.14%
Value of $10,000
Investment (3) $12,471 $22,705 $37,714
One-Year Total Return(4)
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
10.17% 37.24% -4.06% 25.49% 24.71%
1.Cumulative total return represents the change in the Fund's net asset value
over the periods indicated and assumes reinvestment of dividends and capital
gains.
2.Average annual total return represents the average annual increase in value
of an investment and assumes reinvestment of dividends and capital gains.
3.These figures represent the value of a hypothetical $10,000 investment in the
Fund over the specified periods and assume reinvestment of dividends and
capital gains.
4.Total return represents the actual change in value of an investment over the
one-year periods ended on the specified dates.
Note: Total return figures do not include any variable annuity contract fees
and charges, which are described in the Performance Summary. Investment return
and principal value will fluctuate with market conditions, currencies and the
economic and political climates of the countries where investments are made,
and shares, when redeemed, may be worth more or less than their initial cost.
Past performance is not predictive of future results.
TEMPLETON VARIABLE ANNUITY FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
Net asset value, beginning of year $ 20.62 $ 17.96 $ 19.50 $ 14.99 $15.20
------- ------- ------- ------- ------
Income from investment operations:
Net investment income .35 .32 .21 .24 .37
Net realized and unrealized gain (loss) 4.14 3.89 (.96) 5.31 1.16
------- ------- ------- ------- ------
Total from investment operations 4.49 4.21 (.75) 5.55 1.53
------- ------- ------- ------- ------
Distributions:
Dividends from net investment income (.32) (.20) -- (.24) (.39)
Distributions from net realized gains (2.88) (1.35) (.79) (.80) (1.33)
Distributions from other sources -- -- -- -- (.02)
------- ------- ------- ------- ------
Total distributions (3.20) (1.55) (.79) (1.04) (1.74)
------- ------- ------- ------- ------
Change in net asset value 1.29 2.66 (1.54) 4.51 (.21)
------- ------- ------- ------- ------
Net asset value, end of year $ 21.91 $ 20.62 $ 17.96 $ 19.50 $14.99
======= ======= ======= ======= ======
TOTAL RETURN* 24.71% 25.49% (4.06)% 37.24% 10.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $15,649 $14,120 $12,569 $12,698 $9,258
Ratio of expenses to average net assets .96% 1.06% 1.49% 1.37% 1.52%
Ratio of expenses, net of reimbursement, to average
net assets .96% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets 1.64% 1.62% 1.09% 1.36% 2.06%
Portfolio turnover rate 30.27% 33.64% 19.85% 22.13% 27.86%
Average commission rate paid (per share) $ .003
</TABLE>
* TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE FUND OR CONTRACT LEVEL FOR
COST OF INSURANCE CHARGES, PREMIUM LOAD, ADMINISTRATIVE CHARGES, MORTALITY AND
EXPENSE RISK CHARGES OR OTHER CHARGES THAT MAY BE INCURRED UNDER THE VARIABLE
ANNUITY CONTRACT FOR WHICH THE FUND SERVES AS AN UNDERLYING INVESTMENT VEHICLE.
SEE NOTES TO FINANCIAL STATEMENTS.
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS: 93.8%
- ---------------------------------------------------------------------------------------------------------------------
APPLIANCES & HOUSEHOLD DURABLES: 1.7%
Sony Corp. Jpn. 4,000 $ 262,154
- --------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES: 3.7%
Fiat Spa Itl. 53,800 162,216
General Motors Corp. U.S. 4,000 223,000
Volvo AB, B Swe. 8,600 189,784
------------
575,000
- --------------------------------------------------------------------------------------------------------------------------
BANKING: 8.1%
Bankinter SA Sp. 1,400 217,077
Banque Nationale de Paris Fr. 3,050 118,118
Banque Nationale de Paris, ADR, 144A Fr. 700 27,109
Deutsche Bank AG Ger. 3,300 154,222
HSBC Holdings PLC H.K. 12,488 267,214
National Australia Bank Ltd. Aus. 14,000 164,693
Sparbanken Sverige AB, A, 144A Swe. 7,900 135,531
Unidanmark AS, A Den. 3,700 191,628
------------
1,275,592
- --------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS: 1.9%
Cie de Saint Gobain Fr. 1,300 184,031
Pioneer International Ltd. Aus. 37,000 110,285
------------
294,316
- --------------------------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC SERVICES: 2.2%
Wheelabrator Technologies Inc. U.S. 11,000 178,750
WMX Technologies Inc. U.S. 5,000 163,125
------------
341,875
- --------------------------------------------------------------------------------------------------------------------------
CHEMICALS: 4.7%
Akzo Nobel NV Neth. 2,000 273,385
Rhone-Poulenc SA, A Fr. 8,386 286,111
Solvay SA Bel. 300 183,673
------------
743,169
- --------------------------------------------------------------------------------------------------------------------------
DATA PROCESSING & REPRODUCTION: 2.0%
* Bay Networks Inc. U.S. 6,100 127,338
* Newbridge Networks Corp. Can. 6,700 189,275
------------
316,613
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELECTRICAL & ELECTRONICS: 5.6%
Alcatel Alsthom SA Fr. 4,000 $ 321,543
* DSC Communications Corp. U.S. 3,400 60,775
Hitachi Ltd. Jpn. 15,000 139,884
Motorola Inc. U.S. 3,800 233,225
Scitex Corp. Ltd. Isl. 12,100 114,950
------------
870,377
- --------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & INSTRUMENTS: 2.8%
BICC U.K. 38,000 180,320
Intel Corp. U.S. 2,000 261,875
------------
442,195
- --------------------------------------------------------------------------------------------------------------------------
ENERGY SOURCES: 4.1%
Societe Elf Aquitane SA Fr. 2,600 236,833
Total SA, B Fr. 2,862 232,934
Transportadora de Gas del Sur SA, ADR, B Arg. 14,000 171,500
------------
641,267
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES: 5.4%
AXA SA Fr. 3,061 194,818
Dean Witter Discover & Co. U.S. 3,000 198,750
Federal National Mortgage Assn. U.S. 12,000 447,000
------------
840,568
- --------------------------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS: 1.7%
Burns Philp & Co. Ltd. Aus. 78,550 139,855
Chareon Pokphand Feedmill Public Co. Ltd., fgn. Thai. 500 1,813
Nestle SA Swtz. 115 123,463
------------
265,131
- ---------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER: 4.5%
* Asia Pacific Resources International, A Indo. 20,000 112,500
Carter Holt Harvey Ltd. N.Z. 44,226 100,362
* Enso OY, R Fin. 12,000 97,304
Fletcher Challenge Ltd., Forestry Division N.Z. 116,365 194,966
Stora Kopparbergs Bergslags AB, B Swe. 15,000 204,550
------------
709,682
- --------------------------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL CARE: 4.2%
Astra AB, B Swe. 3,600 173,670
* Novartis AG Swtz. 213 243,951
* Nycomed ASA, A Nor. 16,000 244,591
------------
662,212
- --------------------------------------------------------------------------------------------------------------------------
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL COMPONENTS: 1.2%
Madeco Manufacturera de Cobre SA, ADR Chil. 7,500 $ 181,875
- --------------------------------------------------------------------------------------------------------------------------
INSURANCE: 7.0%
GIO Austrailia Holdings Ltd. Aus. 85,017 217,594
HIH Winterthur International Holdings Ltd. Aus. 54,065 135,367
ING Groep NV Neth. 5,076 182,871
Partnerre Ltd. Bmu. 6,000 204,000
Reliastar Financial Corp. U.S. 3,500 202,125
Torchmark Corp. U.S. 3,000 151,500
------------
1,093,457
- --------------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM: 1.8%
Kuoni Reisen Holding AG, B Swtz. 115 279,230
- --------------------------------------------------------------------------------------------------------------------------
MERCHANDISING: 1.3%
Home Depot Inc. U.S. 4,000 200,500
- --------------------------------------------------------------------------------------------------------------------------
METALS & MINING: 0.9%
Boehler Uddeholm AG Aust. 2,000 143,114
- --------------------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY: 4.8%
Hutchison Whampoa Ltd. H.K. 25,500 200,288
Jardine Matheson Holdings Ltd. H.K. 30,544 201,590
La Cemento Nacional CA, GDR Ecu. 600 137,400
La Cemento Nacional CA, GDR, 144A Ecu. 300 68,700
Metro Pacific Corp. Phil. 600,000 148,289
------------
756,267
- --------------------------------------------------------------------------------------------------------------------------
REAL ESTATE: 2.7%
* Fastighets AB Tornet, A Swe. 790 12,047
National Health Investors Inc. U.S. 5,000 189,375
Summit Properties Inc., REIT U.S. 9,700 214,613
------------
416,035
- --------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS: 10.6%
Lucent Technologies Inc. U.S. 1,300 60,125
Nokia AB, A Fin. 4,200 243,783
* SPT Telecom AS Csk. 1,900 236,574
STET (Sta Finanziaria Telefonica Torino) SPA, di
Risp Itl. 79,600 268,939
Telecom Italia Spa Itl. 94,400 245,340
Telefonica de Argentina SA, B, ADR Arg. 3,000 77,625
Telefonica de Espana SA, ADR Sp. 4,200 290,850
Telefonos de Mexico SA, L, ADR Mex. 7,300 240,900
------------
1,664,136
- --------------------------------------------------------------------------------------------------------------------------
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
INDUSTRY ISSUE COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXTILES & APPAREL: 1.8%
*Fruit of the Loom Inc., A U.S. 7,457 $ 282,434
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION: 1.4%
Helikopter Services Group ASA Nor. 16,600 216,024
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES-ELECTRICAL & GAS: 7.7%
*CEZ Csk. 3,600 129,602
Consolidated Electric Power Asia Ltd. H.K. 108,300 254,140
Endesa-Empresa Nacional de Electricidad SA, ADR Sp. 3,600 252,000
Evn Energie-Versorgung Niederoesterreich AG Aust. 1,920 288,962
VEBA AG Ger. 5,000 287,618
------------
1,212,322
------------
TOTAL COMMON STOCKS (cost $10,849,086) 14,685,545
- --------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS: 5.1%
- --------------------------------------------------------------------------------------------------------------------------
News Corp. Ltd., pfd. Aus. 116,842 520,082
Telebras-Telecomunicacoes Brasileiras SA, pfd. Braz. 2,496,267 192,187
Telebras-Telecomunicacoes Brasileiras SA, pfd.,
ADR Braz. 1,000 76,500
------------
TOTAL PREFERRED STOCKS (cost $607,265) 788,769
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
IN
LOCAL
CURRENCY**
- --------------------------------------------------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 1.2% (cost $188,331)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bill, 4.87%, 3/06/97 U.S. 190,000 188,356
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS: 100.1% (cost $11,644,682) 15,662,670
OTHER ASSETS, LESS LIABILITIES: (0.1)% (13,327)
------------
TOTAL NET ASSETS: 100.0% $15,649,343
============
* NON-INCOME PRODUCING.
** CURRENCY OF COUNTRIES INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
Assets:
Investments in securities, at value
(identified cost $11,644,682) $15,662,670
Dividends receivable 39,085
------------
Total assets 15,701,755
------------
Liabilities:
Accrued expenses 52,412
------------
Total liabilities 52,412
------------
Net assets, at value $15,649,343
============
Net assets consist of:
Undistributed net investment income $ 243,664
Net unrealized appreciation 4,017,988
Accumulated net realized gain 2,904,851
Net capital paid in on shares of
beneficial interest 8,482,840
------------
Net assets, at value $15,649,343
============
Shares outstanding 714,416
============
Net asset value per share
($15,649,343 / 714,416) $ 21.91
============
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
Investment income:
(net of $30,977 foreign
taxes withheld)
Dividends $ 364,114
Interest 22,270
-----------
Total income $ 386,384
Expenses:
Management fees (Note 3) 74,375
Administrative fees (Note 3) 22,315
Custodian fees 7,969
Reports to shareholders 5,200
Audit fees 20,500
Legal fees 10,000
Registration and filing fees 1,020
Other 937
-----------
Total expenses 142,316
-----------
Net investment income 244,068
Realized and unrealized gain:
Net realized gain on:
Investments 2,905,760
Foreign currency
transactions 2,489
-----------
2,908,249
-----------
Net unrealized appreciation on:
Investments 126,747
Foreign currency translation
of other assets and
liabilities 1,750
-----------
128,497
-----------
Net realized and unrealized
gain 3,036,746
-----------
Net increase in net assets
resulting from operations $3,280,814
===========
SEE NOTES TO FINANCIAL STATEMENTS.
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 244,068 $ 218,775
Net realized gain on investment and foreign currency transactions 2,908,249 1,942,231
Net unrealized appreciation 128,497 887,079
----------- -----------
Net increase in net assets resulting from operations 3,280,814 3,048,085
Distributions to shareholders:
From net investment income (215,833) (137,838)
From net realized gain (1,942,495) (930,408)
Fund share transactions (Note 2) 407,120 (428,745)
----------- -----------
Net increase in net assets 1,529,606 1,551,094
Net assets:
Beginning of year 14,119,737 12,568,643
----------- -----------
End of year $15,649,343 $14,119,737
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Variable Annuity Fund (the Fund) is a Massachusetts business trust and
an open-end, diversified management investment company registered under the
Investment Company Act of 1940. The Fund seeks long-term capital growth through
a flexible policy of investing primarily in stocks and debt obligations of
companies and governments of any nation. The following summarizes the Fund's
significant accounting policies.
A. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange on
which the securities are traded. Over-the-counter securities for which no sale
is reported are valued at the mean between the last current bid and asked
prices. Securities for which market quotations are not readily available are
valued at fair value as determined by management and approved in good faith by
the Board of Trustees.
B. FOREIGN CURRENCY TRANSACTIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign currencies
are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customarily
enters into a foreign exchange contract to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at the end of the
fiscal period, resulting from changes in the exchange rates.
C. INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND EXPENSES:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign
securities is recorded as soon as information is available to the Fund. Interest
income and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
E. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At December 31, 1996, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 4,369 $ 85,896 17,647 $ 325,840
Shares issued on reinvestment of distributions 117,110 2,158,328 64,121 1,068,246
Shares redeemed (91,811) (1,837,104) (96,898) (1,822,831)
------- ----------- ------- -----------
Net increase (decrease) 29,668 $ 407,120 (15,130) $ (428,745)
======= =========== ======= ===========
</TABLE>
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors of Templeton Investment Counsel,
Inc. (TICI), and Templeton Funds Annuity Company (TFAC), the Fund's investment
manager, and administrative manager, respectively.
The Fund pays monthly an investment management fee to TICI equal, on an annual
basis, to 0.50% of the average daily net assets of the Fund, reduced to 0.45% of
such average daily net assets in excess of $200 million, and to 0.40% of such
net assets in excess of $1.3 billion.
The Fund pays to TFAC an administrative fee equivalent to 0.15% of the average
daily net assets of the Fund during the year, reduced to 0.135% of such net
assets in excess of $200 million, to 0.10% of such net assets in excess of $700
million, and to 0.075% of such assets in excess of $1.2 billion. TFAC has
voluntarily agreed to limit the total expenses of the Fund to an annual rate of
1.00% of the Fund's average net assets through the period ended May 1, 1997. The
amount of the reimbursement is set forth in the Statement of Operations.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel for
the Fund, which firm received fees for the year ended December 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1996 aggregated $4,392,409 and $5,730,445, respectively. The
cost of securities for federal income tax purposes is the same as that shown in
the Investment Portfolio. Realized gains and losses are reported on an
identified cost basis.
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of portfolio securities, based on cost for federal income tax
purposes, was as follows:
Unrealized appreciation $4,397,254
Unrealized depreciation (379,266)
----------
Net unrealized appreciation $4,017,988
==========
TEMPLETON VARIABLE ANNUITY FUND
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
Templeton Variable Annuity Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Variable Annuity Fund as of December 31,
1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Variable Annuity Fund as of December 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
[McGLADREY & PULLEN, LLP SIGNATURE]
New York, New York
January 31, 1997
<PAGE>
SEMI ANNUAL
June 30, 1997
REPORT
TEMPLETON RETIREMENT ANNUITY
- - TRA SEPARATE ACCOUNT
- - TEMPLETON VARIABLE ANNUITY FUND
[TEMPLETON LOGO]
Franklin Templeton
<PAGE>
[CELEBRATING 50 YEARS SEAL]
CELEBRATING 50 YEARS
This year marks 50 years of business for Franklin Templeton. Over these
years, we have experienced profound changes in technology, regulations and
customer expectations within the mutual fund industry. As one of the largest
mutual fund families, we're proud to be an innovative industry leader, providing
people like you with an opportunity to invest in companies and governments
around the globe.
In addition, we want to stress that all securities markets move both up
and down. Mixed in with the good years can be some bad years. Accordingly,
annuity unit values and portfolio share prices also move up and down. Every
investor should expect such fluctuations, which can be wide. When markets are
going down, as well as up, we encourage investors to maintain a long-term
perspective. We thank you for your past support and look forward to serving your
investment needs in the years ahead.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Letter to Shareholders ................................... 1
Performance Summary ...................................... 5
Statement of Investments ................................. 7
Financial Statements ..................................... 10
Notes to Financial Statements ............................ 12
Templeton Funds Retirement Annuity
Separate Account Financial Statements .................... 14
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
We are pleased to bring you the semi-annual report of the Templeton Retirement
Annuity and the Templeton Variable Annuity Fund for the six months ended June
30, 1997.
During the period under review, stock markets around the world generally
performed well. In the U.S., moderate economic growth, benign inflation, and
rising corporate earnings supported a strong but volatile equity market. From
December 31, 1996 through June 30, 1997, the Dow Jones(R) Industrial Average
rose 20.1% and the Standard & Poor's(R) 500 Stock Index rose 20.6%.*
Many European stocks also appreciated in value, as companies there generated
healthy profits due to privatization, restructuring, and cost-reduction
programs. Switzerland, Spain, Finland, and the Netherlands were among the
region's best-performing markets.
Emerging market equities generally experienced substantial gains during the
reporting period, with Latin America in particular delivering stellar returns.
For example, as measured in U.S. dollars, Brazil's Bovespa Index soared 79.5%
and Mexico's Bolsa Index surged 32.9%.* Asian developing markets, however,
provided mixed results. The Hong Kong and Indonesian markets advanced, while
those in Thailand and the Philippines declined.
It is important to remember, of course, that securities markets always have been
- -- and always will be -- subject to volatility. No one can predict exactly how
they will
*Indices are unmanaged, and price appreciation includes reinvested dividends.
One cannot invest directly in an index. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates, Inc.
<PAGE>
perform in the near future. For this reason, we urge you to exercise
patience and focus not on short-term market movements, but on long-term
investment goals.
We appreciate your participation in the Templeton Retirement Annuity and the
Templeton Variable Annuity Fund and look forward to serving your investment
needs in the years to come.
Sincerely,
/s/ Chuck Johnson
Charles E. Johnson
President
Templeton Variable Annuity Fund
/s/ Richard P. Austin
Richard P. Austin
President
Templeton Funds Annuity Company
<PAGE>
MANAGER'S DISCUSSION
Your Fund's Objective: The Templeton Variable Annuity Fund seeks long-term
capital growth through a flexible policy of investing primarily in stocks and
debt obligations of companies and governments of any nation.
During the reporting period, the U.S. economy grew moderately, inflation
remained under control, and the U.S. stock market reached record highs. In
Europe, most equity markets rose as many companies there reduced costs, invested
in new plants and equipment, and implemented programs designed to enhance
shareholder value. And strong economic fundamentals, rising corporate profits,
and renewed interest from foreign investors contributed to the excellent
performance of Latin American markets. Asian stock markets, however, turned in
mixed performances. Hong Kong's market advanced 14.7% during the six-month
period, and Japanese stocks rallied when exports rose and the country's economy
started to recover.(1) But many Thai shares declined in value due to a slowing
economy and a weakening currency. Within this environment, the Fund delivered a
total return of 14.37% for the period, as discussed in the Performance Summary
on page 5. You should keep in mind that Fund performance does not reflect
expenses associated with the variable contract; had those expenses been
included, performance would have been lower.
Between December 31, 1996 and June 30, 1997, the share price of the Fund's
largest holding, Telebras-Telecomunicacoes Brasileiras SA, pfd., rose more than
96%.(2) Our positions in Telefonica de Espana SA, Telmex-Telefonos de Mexico SA,
and Telefonica de Argentina SA also contributed to the Fund's performance, as
did the appreciable gain in share prices of Volvo AB,B (Sweden), Alcatel Alsthom
SA (France), and Newbridge Networks Corp. (Canada). During the six months under
review, we initiated a position in AXA SA, a French financial services company
operating in Europe, Asia, and North America, and purchased shares of Japanese
steelmaker Yamato Kogyo Co. Ltd. and BTR PLC, a diversified industrial products
company based in the United Kingdom. In our opinion, these companies offer
exciting prospects for growth.
1. Price appreciation is measured in U.S. dollars and includes reinvested
dividends.
2. Price appreciation is measured in U.S. dollars.
GEOGRAPHIC DISTRIBUTION
BASED ON TOTAL NET ASSETS
6/30/97
[PIE CHAR APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
Europe 46.7%
Asia 9.5%
North America 22.9%
Latin America 9.6%
Australia/New Zealand 8.0%
Middle East/Africa and Short-Term
Obligations & Other Net Assets 3.3%
</TABLE>
TOP 10 COUNTRIES
REPRESENTED IN THE FUND
6/30/97
<TABLE>
<CAPTION>
% of Total
Country Net Assets
- -------------------------------------------------------
<S> <C>
United States 18.9%
France 10.6%
Hong Kong 6.0%
Switzerland 5.8%
Australia 5.1%
Italy 4.6%
Spain 4.0%
Sweden 3.8%
Brazil 3.2%
Netherlands 3.0%
</TABLE>
<PAGE>
TOP 10 HOLDINGS
6/30/97
<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------------------------------------------------
<S> <C>
Telebras-Telecomunicacoes
Brasileiras SA, pfd.
Telecommunications, Brazil 3.2%
Kuoni Reisen Holdings AG, B
Leisure & Tourism,
Switzerland 2.3%
HSBC Holdings PLC
Banking, Hong Kong 2.2%
Telefonica de Espana SA, ADR
Telecommunications, Spain 2.2%
Rhone-Poulenc SA, A
Chemicals, France 2.0%
Novartis AG
Health & Personal Care,
Switzerland 2.0%
Alcatel Alsthom SA
Electrical & Electronics,
France 2.0%
Endesa-Empresa Nacional
de Electricidad SA, ADR
Utilities Electrical & Gas,
Spain 1.8%
Telecom Italia SpA
Telecommunications, Italy 1.8%
Newbridge Networks Corp.
Data Processing &
Reproduction, Canada 1.7%
</TABLE>
For a complete list of portfolio holdings, please see page 7 of this report.
Although we are concerned about current stock valuations, we are optimistic
about the long-term potential of international equity markets. Our analysts
continue to scour the globe looking for out-of-favor securities trading at
depressed levels relative to their long-term "normalized" earnings. To us,
normalized represents what a company could earn in the middle of a typical
economic cycle and requires us to estimate earnings and cash flow for the next
five years. We believe that such an approach should produce superior returns
over the long term. Of course, it is important to remember that investments in
foreign securities involve special risks including changes in currency values,
market price swings, and economic, social, and political developments in the
countries where the portfolios are invested. Developing markets involve similar
but higher risks related to the smaller size and lesser liquidity of those
markets. These risks are discussed in the prospectus.
This discussion reflects the strategies we employed for the Fund during the six
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
As always, we will strive to build and improve our ability to serve investors
while maintaining the traditional values and principles that have served our
clients well for so long. We appreciate your participation in the Templeton
Variable Annuity Fund and welcome any comments or suggestions you may have.
Sincerely,
/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Variable Annuity Fund
<PAGE>
PERFORMANCE SUMMARY
Templeton Variable Annuity Fund provided a total return of 14.37% for the
six-month period ended June 30, 1997. Total return represents the cumulative or
average annual change in value, assuming reinvestment of dividends and capital
gains. Average returns smooth out variations in returns, which can be
significant; they are not the same as year-by-year results. Past expense
reductions by the manager increased returns. Performance data is historical and
cannot predict or guarantee future results.
We have always maintained a long-term perspective when managing the Fund, and we
encourage you to view your investments in a similar manner. As you can see from
the table below, the Fund delivered a cumulative total return of more than 331%
since its inception on February 16, 1988.
NOTE: PERFORMANCE REFLECTS THE FUND'S OPERATING EXPENSES, BUT DOES NOT INCLUDE
ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT
FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. THESE CHARGES AND DEDUCTIONS CAN AFFECT CONTRACT
VALUES AND INSURANCE BENEFITS. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING
ANY APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS.
<TABLE>
<CAPTION>
TEMPLETON VARIABLE ANNUITY FUND
Periods ended 6/30/97 SINCE
INCEPTION
1-YEAR 5-YEAR (2/16/88)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return 24.60% 19.47% 16.88%
Cumulative Total Return 24.60% 143.37% 331.32%
Value of $10,000 Investment $12,460 $24,337 $43,132
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- ------------------------------------------------------------------------------------------
One-Year Total Return 15.25% 18.98% 13.95% 25.01% 24.60%
</TABLE>
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to the smaller size and lesser liquidity of those
markets. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Six months ended Year ended December 31,
June 30, 1997 ---------------------------------------------------------
(unaudited) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(For a share outstanding throughout the period)
Net asset value, beginning of period.............. $21.91 $20.62 $17.96 $19.50 $14.99 $15.20
----------------------------------------------------------------------
Income from investment operations:
Net investment income........................... .31 .35 .32 .21 .24 .37
Net realized and unrealized gain (loss)......... 2.47 4.14 3.89 (.96) 5.31 1.16
----------------------------------------------------------------------
Total from investment operations.................. 2.78 4.49 4.21 (.75) 5.55 1.53
----------------------------------------------------------------------
Distributions:
Dividends from net investment income............ (.35) (.32) (.20) (.24) (.39)
Distributions from net realized gains........... (4.14) (2.88) (1.35) (.79) (.80) (1.33)
Distributions from other sources................ -- -- -- -- -- (.02)
-----------------------------------------------------------------------
Total distributions............................... (4.49) (3.20) (1.55) (.79) (1.04) (1.74)
-----------------------------------------------------------------------
Change in net asset value......................... (1.71) 1.29 2.66 (1.54) 4.51 (.21)
-----------------------------------------------------------------------
Net asset value, end of period.................... $20.20 $21.91 $20.62 $17.96 $19.50 $14.99
-----------------------------------------------------------------------
Total Return*..................................... 14.37% 24.71% 25.49% (4.06)% 37.24% 10.17%
Ratios /Supplemental Data
Net assets, end of period (000)................... $16,820 $15,649 $14,120 $12,569 $12,698 $9,258
Ratio of expenses to average net assets........... .86%** .96% 1.06% 1.49% 1.37% 1.52%
Ratio of expenses, net of reimbursement, to
average net assets.............................. .86%** .96% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets.......................................... 3.15%** 1.64% 1.62% 1.09% 1.36% 2.06%
Portfolio turnover rate........................... 13.81% 30.27% 33.64% 19.85% 22.13% 27.86%
Average commission rate paid (per share).......... $.0257 $.0030
</TABLE>
*Total return does not include deductions at the Fund or contract level for
costs of insurance charges, premium load, administrative charges, mortality
and expense risk charges that may be incurred under the variable annuity
contract for which the Fund serves as an underlying investment vehicle. Not
annualized for periods of less than one year.
**Annualized.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks 94.0%
Automobiles 4.6%
Ciadea SA............................................ Arg. 30,900 $ 132,890
Fiat SpA............................................. Itl. 53,800 193,432
General Motors Corp.................................. U.S. 4,000 222,750
Volvo AB, B.......................................... Swe. 8,600 230,134
-----------
779,206
-----------
Banking 6.2%
Banque Nationale de Paris............................ Fr. 3,050 125,701
Banque Nationale de Paris, ADR, 144A................. Fr. 700 28,850
Deutsche Bank AG..................................... Ger. 3,300 193,773
HSBC Holdings Plc.................................... H.K. 12,488 375,577
* Philippine National Bank............................. Phil. 17,188 116,642
Unidanmark AS, A..................................... Den. 3,700 207,850
-----------
1,048,393
-----------
Broadcasting & Publishing 1.0%
News Corp. Ltd. ..................................... Aus. 44,742 176,344
-----------
Building Materials & Components 2.0%
Cie de Saint Gobain.................................. Fr. 1,300 189,579
Pioneer International Ltd. .......................... Aus. 37,000 143,036
-----------
332,615
-----------
Business & Public Services 3.3%
Lex Service Plc...................................... U.K. 32,000 200,636
Waste Management Inc. ............................... U.S. 5,000 160,625
Wheelabrator Technologies Inc. ...................... U.S. 11,000 169,813
-----------
531,074
-----------
Chemicals 3.2%
Akzo Nobel NV........................................ Neth. 1,400 191,859
Rhone-Poulenc SA, A.................................. Fr. 8,386 342,478
-----------
534,337
-----------
Data Processing & Reproduction 2.7%
* Bay Networks Inc. ................................... U.S. 6,100 162,031
* Newbridge Networks Corp. ............................ Can. 6,700 291,450
-----------
453,481
-----------
Electrical & Electronics 5.4%
Alcatel Alsthom SA................................... Fr. 2,700 338,149
* DSC Communications Corp. ............................ U.S. 8,100 180,225
Motorola Inc. ....................................... U.S. 3,800 288,800
Scitex Corp. Ltd. ................................... Isl. 12,100 106,631
-----------
913,805
-----------
Electronic Components & Instruments 2.5%
BICC................................................. U.K. 38,000 111,691
Intel Corp. ......................................... U.S. 2,000 283,625
-----------
395,316
-----------
Energy Sources 4.4%
Societe Elf Aquitane SA.............................. Fr. 2,600 280,497
Total SA, B.......................................... Fr. 2,862 289,283
Transportadora de Gas del Sur SA, ADR, B............. Arg. 14,000 175,000
-----------
744,780
-----------
Financial Services 2.5%
AXA SA............................................... Fr. 3,061 190,377
Federal National Mortgage Association ............... U.S. 5,300 231,213
-----------
421,590
-----------
</TABLE>
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks (cont.)
Food & Household Products 1.9%
Burns Philp & Co. Ltd. .............................. Aus. 78,550 $ 145,900
Oshawa Group Ltd. (The).............................. Can. 11,100 165,984
-----------
311,884
-----------
Forest Products & Paper 4.4%
* Asia Pacific Resources International, A.............. Indo. 20,000 97,500
Carter Holt Harvey Ltd. ............................. N.Z. 44,226 114,455
Enso OY, R........................................... Fin. 12,000 110,924
Fletcher Challenge Ltd., Forestry Division........... N.Z. 118,728 172,583
Stora Kopparbergs Bergslags AB, B.................... Swe. 15,000 244,328
-----------
739,790
-----------
Health & Personal Care 4.4%
Astra AB, B.......................................... Swe. 9,600 169,401
Novartis AG.......................................... Swtz. 213 340,392
Nycomed ASA, A....................................... Nor. 16,000 235,769
-----------
745,562
-----------
Industrial Components 4.1%
BTR Plc.............................................. U.K. 41,500 142,022
Exide Corp. ......................................... U.S. 8,300 182,081
Madeco Manufacturera de Cobre, SA ADR................ Chil. 7,500 183,750
Yamato Kogyo Co. Ltd. .............................. Jpn. 19,000 187,331
-----------
695,184
-----------
Insurance 9.3%
GIO Australia Holdings Ltd. ........................ Aus. 85,310 264,093
HIH Winterthur International Holdings Ltd. ......... Aus. 55,469 134,022
Ing Groep NV......................................... Neth. 5,076 234,030
Partnerre Ltd. ...................................... Bmu. 6,000 228,750
Reliastar Financial Corp. .......................... U.S. 3,500 255,938
Torchmark Corp. ..................................... U.S. 3,000 213,750
Zuerich Versicherung, new............................ Swtz. 600 238,685
-----------
1,569,268
-----------
Leisure & Tourism 2.3%
Kuoni Reisen Holding AG, B........................... Swtz. 115 393,701
-----------
Merchandising 2.1%
Home Depot Inc. ..................................... U.S. 4,000 275,750
Macintosh NV......................................... Neth. 4,247 84,598
-----------
360,348
-----------
Metals & Mining 0.9%
Boehler Uddeholm AG.................................. Aust. 2,000 155,094
-----------
Multi-Industry 5.3%
DESC SA, B........................................... Mex. 18,000 131,452
DESC SA, C........................................... Mex. 180 1,299
Hutchison Whampoa Ltd. .............................. H.K. 25,500 220,528
Jardine Matheson Holdings Ltd. ...................... H.K. 31,310 222,301
La Cemento Nacional CA, GDR.......................... Ecu. 600 124,800
La Cemento Nacional CA, GDR, 144A.................... Ecu. 300 62,400
Metro Pacific Corp. ................................. Phil. 600,000 129,663
-----------
892,443
-----------
Real Estate 2.4%
National Health Investors Inc. ...................... U.S. 5,000 196,250
Summit Properties Inc., REIT......................... U.S. 9,700 200,063
-----------
396,313
-----------
</TABLE>
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks (cont.)
Telecommunications 9.0%
Jasmine International Public Co. Ltd., fgn. ......... Thai. 98,000 $ 87,010
Nokia AB, A.......................................... Fin. 2,600 196,273
STET (Sta Finanziaria Telefonica Torino) SpA, di
Risp................................................. Itl. 79,600 275,701
Telecom Italia SpA................................... Itl. 94,400 303,020
Telefonica de Argentina SA, B, ADR................... Arg. 3,000 103,875
Telefonica de Espana SA, ADR......................... Sp. 4,200 362,250
Telmex-Telefonos de Mexico SA, L, ADR................ Mex. 4,000 191,000
-----------
1,519,129
-----------
Textiles & Apparel 0.9%
* Fruit of the Loom Inc., A............................ U.S. 5,057 156,767
-----------
Transportation 2.5%
Air New Zealand Ltd., B.............................. N.Z. 69,000 210,907
Helikopter Services Group ASA........................ Nor. 16,600 212,902
-----------
423,809
-----------
Utilities Electrical & Gas 6.7%
* CEZ.................................................. Csk. 3,600 99,359
Endesa-Empresa Nacional de Electricidad SA, ADR...... Sp. 3,600 306,224
Evn Energie-Versorgung Niederoesterreich AG.......... Aust. 1,920 247,368
Hong Kong Electric Holdings Ltd. .................... H.K. 47,000 189,279
VEBA AG.............................................. Ger. 5,000 282,413
-----------
1,124,643
-----------
Total Common Stocks (Cost $11,411,875)............... 15,814,876
===========
Preferred Stocks 3.2%
Telebras-Telecomunicacoes Brasileiras SA, pfd ADR.... Braz. 1,000 151,750
Telebras-Telecomunicacoes Brasileiras SA, pfd. ...... Braz. 2,496,267 378,654
-----------
Total Preferred Stocks (Cost $85,692)................ 530,404
===========
PRINCIPAL IN
LOCAL CURRENCY**
---------------
Short Term Obligations (Cost $331,142) 2.0%
U.S. Treasury Bill, 4.725% to 5.080% with maturities
to 9/25/97........................................... U.S. 334,000 331,151
-----------
Total Investments: (Cost $11,828,709) 99.2%......... 16,676,431
Other Assets, less liabilities 0.8%................. 143,916
-----------
Total Net Assets: 100.0%............................ $16,820,347
===========
</TABLE>
*Non-income producing.
**Currency of countries indicated.
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1997 (unaudited)
Assets:
Investments in securities, at value
(identified cost $11,828,709) $16,676,431
Receivables:
Investment securities sold 124,742
Dividends and interest 64,456
--------------
Total assets 16,865,629
--------------
Liabilities:
Accrued expenses 45,282
--------------
Total liabilities 45,282
--------------
Net assets, at value 16,820,347
==============
Net assets consist of:
Undistributed net investment income $ 248,292
Net unrealized appreciation 4,845,217
Accumulated net realized gain 1,089,001
Net capital paid in on shares of
beneficial interest 10,637,837
--------------
Net assets, at value $16,820,347
==============
Shares outstanding 832,692
==============
Net asset value per share
($16,820,347 / 832,692 shares
outstanding) $ 20.20
==============
Statement of Operations
for the six months ended June 30, 1997 (unaudited)
Investment income:
(net of $25,068 foreign taxes
withheld)
Dividends $312,017
Interest 7,051
------------
Total income $ 319,068
Expenses:
Management fees (Note 3) 39,758
Administrative fees (Note 3) 11,929
Custodian fees 4,140
Reports to shareholders 2,350
Audit fees 5,500
Legal fees (Note 3) 3,600
Registration and filing fees 450
Other 498
------------
Total expenses 68,225
------------
Net investment income 250,843
Realized and unrealized gain (loss):
Net realized gain on:
Investments 1,087,655
Foreign currency transactions 5,353
------------
1,093,008
------------
Net unrealized appreciation
(depreciation) on:
Investments 829,734
Foreign currency translation of
other assets and liabilities (2,505)
------------
827,229
------------
Net realized and unrealized gain 1,920,237
------------
Net increase in net assets
resulting from operations $2,171,080
============
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six months ended
June 30, 1997 Year ended
(unaudited) December 31, 1996
--------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................................ $ 250,843 $ 244,068
Net realized gain on investments and foreign currency transactions........... 1,093,008 2,908,249
Net unrealized appreciation.................................................. 827,229 128,497
--------------------------------------
Net increase in net assets resulting from operations...................... 2,171,080 3,280,814
--------------------------------------
Distributions to shareholders:
From net investment income................................................... (246,215) (215,833)
From net realized gain....................................................... (2,908,858) (1,942,495)
Fund share transactions (Note 2).............................................. 2,154,997 407,120
--------------------------------------
Net increase in net assets................................................ 1,171,004 1,529,606
Net assets:
Beginning of period........................................................... 15,649,343 14,119,737
--------------------------------------
End of period................................................................. $ 16,820,347 $15,649,343
======================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Variable Annuity Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. Shares of
the Fund are only sold to Templeton Funds Annuity Company to fund the benefits
of Templeton Retirement Annuities and Templeton Immediate Variable Annuities.
The Fund seeks long-term capital growth through a flexible policy of investing
in stocks and debt obligations of companies and governments of any nation. The
following summarizes the Fund's significant accounting policies.
a. Securities Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales
of securities and income items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date.
The Fund does not separately report the effect of the changes in foreign
exchange rates from changes in market prices on securities held. Such changes
are included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the differences between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially all of its taxable income.
d. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and
losses on security transactions are determined on a specific identification
basis. Certain income from foreign securities is recorded as soon as
information is available to the Fund. Interest income and estimated expenses
are accrued daily. Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
e. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the
reporting period. Actual results could differ from those estimates.
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements (unaudited) (continued)
2. BENEFICIAL SHARES
At June 30, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997 December 31, 1996
-----------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................................ 2,279 $ 52,451 4,369 $ 85,896
Shares issued on reinvestment of distributions............................. 169,173 3,155,074 117,110 2,158,328
Shares redeemed............................................................ (53,176) (1,052,528) (91,811) (1,837,104)
-----------------------------------------------------
Net increase............................................................... 118,276 $2,154,997 29,668 $ 407,120
=====================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), and Templeton Funds Annuity Company (TFAC),
the funds investment manager and administrative manager, respectively.
The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows: 0.50% of the first $200 million, reduced to
0.45% in excess of $200 million, and to 0.40% in excess of $1.3 billion. The
Fund pays an administrative fee to TFAC based on the Fund's average daily net
assets as follows: 0.15% of the first $200 million, 0.135% of the next $500
million, 0.10% of the next $500 million, and 0.075% in excess of $1.2 billion.
TFAC agreed in advance to limit the total expenses of the Fund to an annual
rate of 1.00% of the Fund's average net assets through the period ending May
1, 1998.
During the period ended June 30, 1997 , legal fees of $3,600 were paid to a
law firm in which an officer of the Company is a partner.
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 aggregated $2,154,948 and $3,201,636, respectively.
5. INCOME TAXES
At June 30, 1997, the net unrealized appreciation based on cost of investments
for income tax purposes of $11,828,709 was as follows:
Unrealized appreciation....................................... $5,425,684
Unrealized depreciation....................................... (577,962)
--------------
Net unrealized appreciation................................... $4,847,722
==============
<PAGE>
