<PAGE> 1
[TEMPLETON INVESTMENT PLUS LOGO]
TEMPLETON
INVESTMENT
PLUS
ANNUAL REPORT
DECEMBER 31, 1996
o TEMPLETON VARIABLE PRODUCTS SERIES FUND
[FRANKLIN TEMPLETON LOGO]
[GLOBE BACKGROUND]
<PAGE> 2
TABLE OF CONTENTS
Templeton Investment Plus (TIP) is an individual deferred variable annuity
contract issued by the Phoenix Home Life Mutual Insurance Company. On the
following pages, you will find a report on each of the funds available within
TIP:
<TABLE>
<S> <C>
LETTER TO CONTRACT OWNERS ........................................... 2
TEMPLETON STOCK FUND ................................................ 4
TEMPLETON INTERNATIONAL FUND ........................................ 8
TEMPLETON DEVELOPING MARKETS FUND ................................... 12
TEMPLETON ASSET ALLOCATION FUND ..................................... 17
TEMPLETON BOND FUND ................................................. 21
TEMPLETON MONEY MARKET FUND ......................................... 25
</TABLE>
1
<PAGE> 3
LETTER TO
CONTRACT OWNERS
February 18, 1997
Dear Contract Owner:
We are pleased to bring you the annual report of Templeton Investment Plus and
Templeton Variable Products Series 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
<PAGE> 4
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 Plus,
which tracks the performance of bond markets in 14 developing nations, produced
a total return of 39.3%, while the Salomon Brothers World Government Bond Index,
representative of government bonds in 15 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 Templeton Investment Plus and Templeton
Variable Products Series 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
<PAGE> 5
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 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 on 12/31/96
Based on Total Net Assets
[PIE CHART]
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%
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
<PAGE> 6
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>
% of Total
Company, Industry, Country 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 27 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
<PAGE> 7
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)
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
7.12% 34.00% -2.20% 25.24% 22.48%
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
<PAGE> 8
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.* 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.
TEMPLETON STOCK FUND
Total Return Index Comparison - $10,000 Investment (8/24/88 - 12/31/96)
[LINE GRAPH]
<TABLE>
<CAPTION>
8/24/88
Inception: Templeton Stock Fund MSCI World Index CPI
<S> <C> <C> <C> <C> <C>
8/24/88 $ 10,000 $ 10,000 $ 10,000
8/31/88 $ 9,876 0.09% $ 10,000 -1.24% $ 10,009
9/30/88 $ 10,297 0.67% $ 10,060 4.26% $ 10,077
10/31/88 $ 10,984 0.33% $ 10,370 6.67% $ 10,110
11/30/88 $ 11,368 0.08% $ 10,240 3.50% $ 10,118
12/31/88 $ 11,473 0.17% $ 10,270 0.92% $ 10,135
1/31/89 $ 11,890 0.50% $ 10,750 3.64% $ 10,186
2/28/89 $ 11,818 0.41% $ 10,560 -0.61% $ 10,228
3/31/89 $ 11,745 0.58% $ 10,760 -0.62% $ 10,287
4/30/89 $ 12,017 0.65% $ 11,011 2.32% $ 10,354
5/31/89 $ 11,724 0.57% $ 10,981 -2.44% $ 10,413
6/30/89 $ 11,594 0.24% $ 10,811 -1.11% $ 10,438
7/31/89 $ 12,906 0.24% $ 11,522 11.32% $ 10,463
8/31/89 $ 12,596 0.16% $ 11,812 -2.40% $ 10,480
9/30/89 $ 12,954 0.32% $ 11,782 2.84% $ 10,513
10/31/89 $ 12,524 0.48% $ 11,101 -3.32% $ 10,564
11/30/89 $ 13,026 0.24% $ 11,281 4.01% $ 10,589
12/31/89 $ 13,447 0.16% $ 11,772 3.23% $ 10,606
1/31/90 $ 12,822 1.03% $ 11,342 -4.65% $ 10,715
2/28/90 $ 12,274 0.47% $ 11,412 -4.27% $ 10,765
3/31/90 $ 11,535 0.55% $ 11,614 -6.02% $ 10,825
4/30/90 $ 11,372 0.16% $ 11,175 -1.42% $ 10,842
5/31/90 $ 12,571 0.23% $ 12,023 10.55% $ 10,867
6/30/90 $ 12,483 0.54% $ 12,033 -0.70% $ 10,926
7/31/90 $ 12,599 0.38% $ 12,033 0.93% $ 10,967
8/31/90 $ 11,423 0.92% $ 11,165 -9.34% $ 11,068
9/30/90 $ 10,220 0.84% $ 10,145 -10.53% $ 11,161
10/31/90 $ 11,176 0.60% $ 10,012 9.36% $ 11,228
11/30/90 $ 10,995 0.22% $ 10,318 -1.62% $ 11,253
12/31/90 $ 11,227 0.00% $ 10,492 2.11% $ 11,253
1/31/91 $ 11,640 0.60% $ 11,063 3.68% $ 11,320
2/28/91 $ 12,720 0.15% $ 11,808 9.27% $ 11,337
3/31/91 $ 12,347 0.15% $ 11,727 -2.93% $ 11,354
4/30/91 $ 12,446 0.15% $ 11,737 0.80% $ 11,371
5/31/91 $ 12,729 0.30% $ 12,115 2.28% $ 11,405
6/30/91 $ 11,945 0.29% $ 11,496 -6.16% $ 11,438
7/31/91 $ 12,511 0.15% $ 12,189 4.74% $ 11,455
8/31/91 $ 12,474 0.29% $ 12,367 -0.30% $ 11,489
9/30/91 $ 12,803 0.44% $ 12,472 2.64% $ 11,539
10/31/91 $ 13,013 0.15% $ 12,630 1.64% $ 11,557
11/30/91 $ 12,448 0.29% $ 12,283 -4.34% $ 11,590
12/31/91 $ 13,357 0.07% $ 13,354 7.30% $ 11,598
1/31/92 $ 13,113 0.15% $ 13,396 -1.83% $ 11,616
2/29/92 $ 12,888 0.36% $ 13,827 -1.71% $ 11,657
3/31/92 $ 12,284 0.51% $ 13,544 -4.69% $ 11,717
4/30/92 $ 12,457 0.14% $ 13,994 1.41% $ 11,733
5/31/92 $ 12,956 0.14% $ 14,509 4.00% $ 11,750
6/30/92 $ 12,524 0.36% $ 14,155 -3.33% $ 11,792
7/31/92 $ 12,558 0.21% $ 14,187 0.27% $ 11,817
8/31/92 $ 12,866 0.28% $ 13,887 2.45% $ 11,850
9/30/92 $ 12,750 0.28% $ 13,898 -0.90% $ 11,883
10/31/92 $ 12,407 0.35% $ 13,769 -2.69% $ 11,925
11/30/92 $ 12,631 0.14% $ 14,016 1.81% $ 11,941
12/31/92 $ 12,736 -0.07% $ 14,305 0.83% $ 11,933
1/31/93 $ 12,781 0.49% $ 14,499 0.35% $ 11,991
2/28/93 $ 13,086 0.35% $ 14,831 2.39% $ 12,033
3/31/93 $ 13,848 0.35% $ 15,310 5.82% $ 12,075
4/30/93 $ 14,492 0.28% $ 15,550 4.65% $ 12,109
5/31/93 $ 14,828 0.14% $ 16,042 2.32% $ 12,126
6/30/93 $ 14,706 0.14% $ 16,130 -0.82% $ 12,143
7/31/93 $ 15,012 0.00% $ 16,370 2.08% $ 12,143
8/31/93 $ 15,703 0.28% $ 17,442 4.60% $ 12,177
9/30/93 $ 15,416 0.21% $ 17,573 -1.83% $ 12,203
10/31/93 $ 15,843 0.41% $ 18,317 2.77% $ 12,253
11/30/93 $ 14,949 0.07% $ 17,858 -5.64% $ 12,261
12/31/93 $ 15,683 0.00% $ 19,170 4.91% $ 12,261
1/31/94 $ 16,720 0.27% $ 20,231 6.61% $ 12,295
2/28/94 $ 16,506 0.34% $ 19,509 -1.28% $ 12,336
3/31/94 $ 15,798 0.34% $ 18,604 -4.29% $ 12,378
4/30/94 $ 16,289 0.14% $ 18,892 3.11% $ 12,396
5/31/94 $ 16,333 0.07% $ 19,146 0.27% $ 12,404
6/30/94 $ 16,289 0.34% $ 18,593 -0.27% $ 12,446
7/31/94 $ 16,601 0.27% $ 19,534 1.92% $ 12,480
8/31/94 $ 17,103 0.40% $ 20,242 3.02% $ 12,530
9/30/94 $ 16,656 0.27% $ 19,622 -2.61% $ 12,564
10/31/94 $ 17,135 0.07% $ 19,821 2.87% $ 12,573
11/30/94 $ 16,394 0.13% $ 18,980 -4.32% $ 12,589
12/31/94 $ 16,557 0.00% $ 18,748 0.99% $ 12,589
1/31/95 $ 16,312 0.40% $ 18,516 -1.48% $ 12,639
2/28/95 $ 16,553 0.40% $ 19,074 1.48% $ 12,690
3/31/95 $ 17,354 0.33% $ 19,412 4.84% $ 12,732
4/30/95 $ 17,963 0.33% $ 20,156 3.51% $ 12,774
5/31/95 $ 18,120 0.20% $ 20,911 0.87% $ 12,799
6/30/95 $ 18,118 0.20% $ 21,395 -0.01% $ 12,825
7/31/95 $ 19,027 0.00% $ 22,454 5.02% $ 12,825
8/31/95 $ 18,607 0.26% $ 22,218 -2.21% $ 12,858
9/30/95 $ 19,152 0.20% $ 22,849 2.93% $ 12,884
10/31/95 $ 18,853 0.33% $ 22,331 -1.56% $ 12,926
11/30/95 $ 19,511 -0.07% $ 22,860 3.49% $ 12,917
12/31/95 $ 20,085 -0.07% $ 23,480 2.94% $ 12,908
1/31/96 $ 20,452 0.59% $ 23,942 1.83% $ 12,985
2/29/96 $ 20,581 0.32% $ 24,335 0.63% $ 13,026
3/31/96 $ 20,927 0.52% $ 24,850 1.68% $ 13,094
4/30/96 $ 21,423 0.39% $ 25,390 2.37% $ 13,145
5/31/96 $ 21,444 0.19% $ 25,767 0.10% $ 13,170
6/30/96 $ 21,556 0.06% $ 25,956 0.52% $ 13,178
7/31/96 $ 20,797 0.19% $ 24,850 -3.52% $ 13,203
8/31/96 $ 21,040 0.19% $ 25,717 1.17% $ 13,228
9/30/96 $ 21,867 0.32% $ 26,333 3.93% $ 13,270
10/31/96 $ 22,025 0.32% $ 26,735 0.72% $ 13,313
11/30/96 $ 23,263 0.19% $ 28,154 5.62% $ 13,338
12/31/96 $ 22,895 0.00% $ 28,745 -1.58% $ 13,338
</TABLE>
Templeton Stock Fund(1) MSCI World Index(2) Consumer 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 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.
* 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.
7
<PAGE> 9
TEMPLETON
INTERNATIONAL
FUND
The 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.
We are pleased to report that the Fund provided a total return of 24.04% for the
12-month period ended December 31, 1996, as discussed in the Performance Summary
on page 10. Its benchmark, the unmanaged Morgan Stanley Capital International
Europe(R)(1), Australasia, Far East (MSCI EAFE) Index, posted a total return of
only 6.36% for the same period. The Fund's strong performance was in part the
result of our bottom-up, value style of investing and our relative overweighting
in markets that performed exceptionally well during the fiscal year. Our
underweighting in poorly performing markets, particularly Japan, also aided the
Fund's performance. 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.
At the end of the reporting period, European holdings comprised our largest
geographic exposure, representing 61.0% of the Fund's total net assets, up from
56.9% on December 31, 1995. Compared with the MSCI EAFE Index, the Fund was
overweighted in Spain, Finland, and Sweden -- three countries whose stock
markets increased more than 35% in U.S. dollar terms during the reporting
period.(2) Among the Fund's ten largest holdings, the share price of
Stadshypotek AB appreciated 37.4%, Rhone-Poulenc SA 59.5%, and Telefonica de
Espana SA more than 65% in 1996. During the twelve months under review, we
initiated positions in British Telecommunications PLC, Fiat Spa, and Nokia AB,
and sold our holdings of U.K. utility Southern Electric PLC, Dutch insurer Aegon
NV, and Swiss food manufacturer Nestle SA at a profit.
TEMPLETON INTERNATIONAL FUND
Geographic Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART]
Europe 61.0%
Asia 10.1%
Australia/New Zealand 6.7%
Latin America 5.9%
North America 4.6%
Middle East/Africa 0.5%
Short-Term Obligations
& Other Net Assets 11.2%
Although some Asian stock markets performed poorly in 1996 because of slowing
economies and weakening currencies, Hong Kong's equity market rose 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.(3)
During the period, we added to our holdings of Consolidated Electric Power Asia
Ltd. and Hong Kong Electric, two Hong Kong utilities, and the Fund's performance
benefited from its relatively large exposure in Hong Kong. Indonesia's stock
market also strengthened appreciably during the fiscal year, and we initiated
positions in Asia Pulp and Paper Co. Ltd, a large Indonesian paper company, and
PT Bank Bali, a major Indonesian bank. However, we limited our exposure to
Japan, whose stock market declined more than 12% in U.S. dollar terms during
1996.(4) Our Japanese holdings represented less than
(1) A REGISTERED TRADEMARK OF MORGAN STANLEY AND CO., INC. TOTAL RETURN INCLUDES
REINVESTED DIVIDENDS. ONE CANNOT INVEST DIRECTLY IN AN INDEX.
(2) PRICE APPRECIATION INCLUDES REINVESTED DIVIDENDS.
(3) PRICE APPRECIATION MEASURED IN U.S. DOLLARS, AND INCLUDES REINVESTED
DIVIDENDS.
(4) PRICE DEPRECIATION INCLUDES REINVESTED DIVIDENDS.
8
<PAGE> 10
1% of the Fund's total net assets at the end of the fiscal year, compared with a
32.3% weighting in the MSCI EAFE Index. Based on standard measures such as
price/earnings ratios, we believe that Japanese stocks remain among the world's
most expensive, and we do not anticipate increasing our Japanese exposure
meaningfully unless valuations fall substantially.
Latin American equity markets rebounded strongly in 1996 due to improved
economic fundamentals and renewed interest from foreign investors. The
telecommunications and electric utility industries performed well, increasing
the value of our holdings of Telecomunicaciones de Chile SA (CTC),
Telebras-Telecomunicacoes Brasileiras SA (Telebras), and Eletricidad de Caracas.
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. During the year, we added to our holdings of
Telefonica de Argentina, Telefonica del Peru, and Telefonos de Mexico, and we
realized profits by eliminating our position in CTC.
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
INTERNATIONAL FUND
Top 10 Holdings on 12/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
<S> <C>
Nokia AB, A
Telecommunications, Finland 2.0%
BTR PLC
Multi-Industry, United Kingdom 1.7%
Merita Ltd., A
Banking, Finland 1.6%
Fletcher Challenge Ltd. Forestry Division
Forest Products & Paper, New Zealand 1.5%
Stadshypotek AB, A
Banking, Sweden 1.5%
Volvo AB, B
Automobiles, Sweden 1.5%
Telefonica de Espana SA, ADR
Telecommunications, Spain 1.4%
Telecom Italia Spa di Risp
Telecommunications, Italy 1.4%
Rhone-Poulenc SA, A
Chemicals, France 1.4%
Telebras-Telecomunicacoes Brasileiras
SA, pfd., Telecommunications, Brazil 1.4%
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 30 OF THIS REPORT.
IMPORTANT NOTICE
At a special meeting held on February 10, 1997, the shareholders of the
Templeton International 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.
9
<PAGE> 11
PERFORMANCE
SUMMARY
The Templeton International Fund delivered a total return of 24.04% 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 INTERNATIONAL FUND
Periods ended 12/31/96
<TABLE>
<CAPTION>
Since
Inception
1-Year 3-Year (5/1/92)
<S> <C> <C> <C>
Average Annual
Total Return(1) 24.04% 11.98% 15.28%
Cumulative
Total Return(2) 24.04% 40.42% 94.21%
Value of $10,000
Investment(3) $12,404 $14,042 $19,421
</TABLE>
One-Year Total Return(4)
12/31/94 12/31/95 12/31/96
-2.22% 15.78% 24.04%
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.
10
<PAGE> 12
The graph below shows how a $10,000 investment in the Fund since inception has
outperformed the unmanaged Morgan Stanley Capital International Europe,
Australasia, Far East (MSCI EAFE) 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 EUROPE, AUSTRALASIA, FAR EAST (MSCI
EAFE) INDEX INCLUDES APPROXIMATELY 1,000 COMPANIES REPRESENTING THE STOCK
MARKETS OF 20 COUNTRIES IN EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. THE
AVERAGE COMPANY HAS A MARKET CAPITALIZATION OF OVER $3 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.
TEMPLETON INTERNATIONAL FUND
Total Return Index Comparison - $10,000 Investment (5/1/92 - 12/31/96)
[LINE CHART]
<TABLE>
<CAPTION>
Templeton International Fund MSCI EAFE Index CPI
<S> <C> <C> <C> <C> <C>
5/1/92 $10,000 $10,000 $10,000
5/31/92 $ 9,960 6.72% $10,672 0.14% $10,014
6/30/92 $ 9,720 -4.71% $10,169 0.36% $10,050
7/31/92 $ 9,570 -2.53% $ 9,912 0.21% $10,071
8/31/92 $ 9,470 6.31% $10,538 0.28% $10,099
9/30/92 $ 9,270 -1.94% $10,333 0.28% $10,128
10/31/92 $ 9,170 -5.22% $ 9,794 0.35% $10,163
11/30/92 $ 9,250 0.97% $ 9,889 0.14% $10,177
12/31/92 $ 9,390 0.55% $ 9,943 -0.07% $10,170
1/31/93 $ 9,440 0.02% $ 9,945 0.49% $10,220
2/28/93 $ 9,740 3.05% $10,248 0.35% $10,256
3/31/93 $10,040 8.75% $11,145 0.35% $10,292
4/30/93 $10,370 9.52% $12,206 0.28% $10,320
5/31/93 $10,640 2.14% $12,467 0.14% $10,335
6/30/93 $10,580 -1.54% $12,275 0.14% $10,349
7/31/93 $10,770 3.52% $12,707 0.00% $10,349
8/31/93 $11,610 5.42% $13,396 0.28% $10,378
9/30/93 $11,570 -2.23% $13,097 0.21% $10,400
10/31/93 $12,460 3.10% $13,503 0.41% $10,443
11/30/93 $12,510 -8.72% $12,326 0.07% $10,450
12/31/93 $13,830 7.24% $13,218 0.00% $10,450
1/31/94 $14,610 8.48% $14,339 0.27% $10,478
2/28/94 $14,040 -0.26% $14,302 0.34% $10,514
3/31/94 $13,328 -4.29% $13,688 0.34% $10,550
4/30/94 $13,461 4.27% $14,273 0.14% $10,565
5/31/94 $13,543 -0.55% $14,194 0.07% $10,572
6/30/94 $13,113 1.43% $14,397 0.34% $10,608
7/31/94 $13,881 0.99% $14,540 0.27% $10,636
8/31/94 $14,402 2.39% $14,887 0.40% $10,679
9/30/94 $14,106 -3.13% $14,422 0.27% $10,708
10/31/94 $14,290 3.35% $14,905 0.07% $10,715
11/30/94 $13,666 -4.78% $14,192 0.13% $10,729
12/31/94 $13,523 0.65% $14,284 0.00% $10,729
1/31/95 $13,164 -3.82% $13,739 0.40% $10,772
2/28/95 $13,338 -0.26% $13,703 0.40% $10,815
3/31/95 $13,338 6.27% $14,562 0.33% $10,851
4/30/95 $13,990 3.79% $15,114 0.33% $10,887
5/31/95 $14,425 -1.16% $14,939 0.20% $10,909
6/30/95 $14,611 -1.73% $14,680 0.20% $10,930
7/31/95 $15,336 6.25% $15,598 0.00% $10,930
8/31/95 $14,953 -3.79% $15,007 0.26% $10,959
9/30/95 $15,336 1.98% $15,304 0.20% $10,981
10/31/95 $14,963 -2.66% $14,897 0.33% $11,017
11/30/95 $15,232 2.81% $15,315 -0.07% $11,009
12/31/95 $15,656 4.05% $15,936 -0.07% $11,002
1/31/96 $16,122 0.43% $16,004 0.59% $11,066
2/29/96 $16,349 0.36% $16,062 0.32% $11,102
3/31/96 $16,391 2.15% $16,407 0.52% $11,160
4/30/96 $16,993 2.93% $16,888 0.39% $11,203
5/31/96 $17,225 -1.82% $16,580 0.19% $11,224
6/30/96 $17,362 0.59% $16,678 0.06% $11,231
7/31/96 $16,740 -2.90% $16,195 0.19% $11,252
8/31/96 $17,331 0.24% $16,234 0.19% $11,274
9/30/96 $17,669 2.68% $16,669 0.32% $11,310
10/31/96 $18,017 -1.00% $16,502 0.32% $11,346
11/30/96 $18,967 4.00% $17,162 0.19% $11,368
12/31/96 $19,421 -1.26% $16,946 0.00% $11,368
</TABLE>
Templeton International Fund(1) MSCI EAFE Index(2) Consumer 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 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.
11
<PAGE> 13
TEMPLETON DEVELOPING MARKETS FUND
The Templeton Developing Markets Fund seeks long-term capital appreciation by
investing primarily in equity securities of issuers in countries having
developing markets.
The Fund was made available to investors on March 4, 1996, and, at the end of
the reporting period, 83.3% of the Fund's total net assets were invested in
equities in 27 markets, with the remaining 16.7% held in cash and other liquid
instruments. Our largest country holdings were Thailand (9.8% of total net
assets), Turkey (8.9%), South Africa (6.3%), Hong Kong (5.8%), and Mexico
(5.6%). As might be expected, returns on investments in developing countries
varied according to each market's particular economic and political
circumstances.
In Asia, the Hong Kong stock market rallied strongly, buoyed by broad economic
recovery particularly in the retail and property sectors. Chinese B shares --
intended for foreign investors -- rallied sharply at the beginning of November
due to expectations of higher company earnings. Malaysia's and Taiwan's markets
also performed well. However, some Asian markets experienced steep setbacks.
Pakistan's stock market fell dramatically during the last few months of the
year, finishing 1996 down 22.8%(1). And undermined by a slowdown in economic
growth and poor corporate earnings, Thailand's equity market plummeted 35.1% and
South Korea's suffered a loss of 32.5%(1). Since 18.0% of the Fund's total net
assets were invested in these countries as of December 31, 1996, these declines
negatively impacted the Fund's performance. However, our policy is to take a
five-year view of emerging markets and invest in companies which, according to
our analysts' estimations, should produce the best returns over a five-year time
frame. Although some companies with depressed share prices today could be top
performers in the future, this change might not become evident for six months,
one year, or even after two years.
TEMPLETON DEVELOPING
MARKETS FUND
Geographic Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART]
Asia 50.6%
Europe 12.6%
Latin America 12.0%
Middle East/Africa 8.1%
Short-Term Obligations &
Other Net Assets 16.7%
Many Latin American equity markets rebounded in 1996 due to improved economic
fundamentals and renewed interest from foreign investors. In Mexico, subdued
inflation, a strengthening currency and declining interest rates buoyed stocks.
And by balancing the national budget and privatizing government-owned companies,
Brazil reduced inflation from more than 2,500% per annum in 1993, to an
annualized level of just 14% in August 1996. As a result, its stock market
attracted significant capital from both domestic and international investors,
and the Bovespa Index increased 54.6% during 1996(2).
In Eastern Europe, Russia and Poland experienced rising equity prices. Early in
1996, prices of Russian stocks were depressed because of fears that a Communist
victory in the June presidential election would result in a repeal of previously
enacted economic reforms. But, as the balloting drew near and
(1) PRICE DEPRECIATION MEASURED IN U.S. DOLLARS, AND INCLUDES REINVESTED
DIVIDENDS, IF ANY.
(2) PRICE APPRECIATION MEASURED IN U.S. DOLLARS, AND INCLUDES REINVESTED
DIVIDENDS, IF ANY.
12
<PAGE> 14
TEMPLETON DEVELOPING MARKETS FUND
Top 10 Holdings on 12/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
<S> <C>
Turkiye Demir Dokum, br.
Appliances & Household Durables,
Turkey 2.8%
Borusan AS
Industrial Components, Turkey 2.3%
Hopewell Holdings Ltd.
Construction & Housing, Hong Kong 1.8%
Cementos Mexicanos SA de CV (Cemex), B
Building Materials & Components,
Mexico 1.8%
CEZ
Utilities - Electrical & Gas,
Czech Republic 1.6%
Izocam Ticaret ve Sanayii AS, br.
Building Materials & Components,
Turkey 1.6%
Sino-Thai Engineering &
Construction Public Co.
Construction & Housing, Thailand 1.5%
Siam Cement Public Co. Ltd. (The), fgn.
Building Materials & Components,
Thailand 1.4%
Itausa-Investimentos Itau SA, pfd.
Multi-Industry, Brazil 1.4%
Saha Pathanapibul Public Co. Ltd.
Food & Household Products, Thailand 1.3%
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 34 OF THIS REPORT.
TEMPLETON DEVELOPING MARKETS FUND
Top 10 Countries Represented
in the Fund on 12/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Country Net Assets
<S> <C>
Thailand 9.8%
Turkey 8.9%
South Africa 6.3%
Hong Kong 5.8%
Mexico 5.6%
Singapore 5.3%
Indonesia 4.6%
Pakistan 4.4%
Russia 4.0%
South Korea 3.8%
</TABLE>
Boris Yeltsin's win seemed likely, prices of several stocks more than tripled.
Although some equity prices fell after the elections, the Moscow Times Index
increased 126.4% for the year as a whole. The Polish stock market, sparked by
privatization, foreign investment, and rapid growth in construction activity,
rose 62.3%(2).
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.
Looking forward, we believe that weak markets such as Thailand and South Korea
should offer good opportunities to purchase stocks at bargain prices. We also
believe that, even after last year's strong rise, the Russian stock market has
room to advance. Russia possesses some of the largest natural reserves in the
world and has companies that may one day be equal to the best in their fields.
We are concerned, however, about the outlook for Hong Kong following its
transfer to China on July 1, 1997. But, even though there is a possibility of
economic disaster, in our opinion it is more likely that Hong Kong's economy
will continue to prosper. The Chinese government has indicated that the economic
and social status quo will
13
<PAGE> 15
be maintained, and evidence that investors believe
this can be found in the narrowing of the gap in valuations between Hong Kong
stocks and other Asian stocks.
It is important to remember that investing in emerging markets involves special
considerations which may include risks related to market and currency
volatility, adverse social and political developments, and the relatively small
size and lesser liquidity of these markets. These special risks and other
considerations are discussed in the Fund's prospectus. While short-term
volatility can be disconcerting, declines of as much as 40% to 50% are not
unusual in emerging markets. For example, Hong Kong's market has increased 857%
in the last 15 years, but has suffered five declines of more than 20% during
that time.(3)
3 SOURCE: BLOOMBERG. BASED ON QUARTERLY PERCENTAGE PRICE CHANGE OVER 15 YEARS
ENDED DECEMBER 31, 1996.
14
<PAGE> 16
PERFORMANCE
SUMMARY
The Templeton Developing Markets Fund reported a total return of -5.70% for the
period from the Fund's inception through 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 DEVELOPING
MARKETS FUND
Period ended 12/31/96
<TABLE>
<CAPTION>
Since
Inception
(3/4/96)
<S> <C>
Aggregate Total Return(1) -5.70%
Cumulative Total Return(2) -5.70%
Value of $10,000
Investment(3) $9,430
</TABLE>
1. 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.
2. CUMULATIVE TOTAL RETURN REPRESENTS THE CHANGE IN THE FUND'S NET ASSET VALUE
OVER THE PERIOD INDICATED.
3. THIS FIGURE REPRESENTS THE VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN THE
FUND OVER THE SPECIFIED PERIOD.
THE FUND'S INVESTMENT MANAGER AND BUSINESS MANAGER HAVE AGREED IN ADVANCE TO
WAIVE A PORTION OF THEIR RESPECTIVE FEES, WHICH INCREASES TOTAL RETURN TO
CONTRACT OWNERS. IF THE MANAGERS HAD NOT TAKEN THIS ACTION, THE FUND'S TOTAL
RETURN WOULD HAVE BEEN LOWER. THE FEE WAIVER MAY BE DISCONTINUED AT ANY TIME
AFTER MAY 1, 1997, UPON NOTICE TO THE FUND'S BOARD OF TRUSTEES.
NOTE: TOTAL RETURN FIGURES DO NOT INCLUDE ANY VARIABLE INSURANCE 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.
15
<PAGE> 17
The graph below compares the performance of the Fund with that of the broad
based Morgan Stanley Capital International(R)* (MSCI) World Index. The index
contains approximately 1,500 companies representing the stock markets of 22
countries including the U.S., Europe, Canada, Australia, New Zealand, and the
Far East. It differs from the Fund because it includes stocks from some
developed countries such as the U.S. where the Fund is not allowed to invest. On
December 31, 1996, the index's U.S. weighting was 43.2%.
The graph also compares the Fund's performance with that of the more narrow
International Finance Corporation's (IFC) Investable Composite Index and the
Consumer Price Index. The IFC Investable Composite Index was designed to reflect
the performance of emerging market investments and includes 1,225 stocks that
foreigners can buy in 26 countries, including Mexico, South Korea, Brazil,
Jordan and Turkey. The Consumer Price Index is used as a measurement of
inflation.
Please remember that the Fund's performance differs from that of the indices
because the indices are unmanaged, do not contain cash (the Fund generally
carries a percentage of cash at any given time) and include no sales charges or
management expenses. The Fund's performance can also be markedly different
because our philosophy of investing in bargain stocks may result in our
purchasing stocks that are not predominant in any index, and not "popular" index
stocks. Of course, one cannot invest directly in an index.
Performance data is historical and cannot predict future results. Principal
value and investment return will fluctuate with market conditions, currencies
and the economic and political climates of the countries where investments are
made, and you may have a gain or loss when you withdraw money.
*A REGISTERED TRADEMARK OF MORGAN STANLEY AND CO., INC. TOTAL RETURN INCLUDES
REINVESTED DIVIDENDS. ONE CANNOT INVEST DIRECTLY IN AN INDEX.
TEMPLETON DEVELOPING MARKETS FUND
Total Return Index Comparison - $10,000 Investment (3/4/96-12/31/96)
[LINE CHART]
<TABLE>
<CAPTION>
Templeton Developing Markets Fund MSCI World Index CPI IFC Investible Composite Index
<S> <C> <C> <C> <C> <C> <C> <C>
3/1/96 $ 10,000 $ 10,000 $ 10,000 $ 10,000
3/31/96 $ 10,020 1.68% $ 10,168 0.52% $ 10,052 1.44% $ 10,144
4/30/96 $ 9,980 2.37% $ 10,409 0.39% $ 10,091 4.04% $ 10,554
5/31/96 $ 10,010 0.10% $ 10,419 0.19% $ 10,110 -0.89% $ 10,460
6/30/96 $ 9,800 0.52% $ 10,474 0.06% $ 10,116 1.17% $ 10,582
7/31/96 $ 9,250 -3.52% $ 10,105 0.19% $ 10,136 -6.56% $ 9,888
8/31/96 $ 9,250 1.17% $ 10,223 0.19% $ 10,155 3.10% $ 10,195
9/30/96 $ 9,370 3.93% $ 10,625 0.32% $ 10,187 1.48% $ 10,345
10/31/96 $ 9,140 0.72% $ 10,701 0.32% $ 10,220 -2.15% $ 10,123
11/30/96 $ 9,460 5.62% $ 11,303 0.19% $ 10,239 1.48% $ 10,273
12/31/96 $ 9,430 -1.58% $ 11,124 0.00% $ 10,239 0.44% $ 10,318
</TABLE>
Templeton Developing Markets Fund(1) MCSI World Index(2)
IFC Investable Composite Index(2) Consumer Price Index(3)
AGGREGATE TOTAL RETURN(4)
Since Inception: -5.70%
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. Indices are unmanaged and include reinvested dividends or interest.
3. Source: U.S. Bureau of Labor Statistics.
4. See footnote 1 on page 15.
16
<PAGE> 18
TEMPLETON
ASSET
ALLOCATION
FUND
The 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. The Fund's assets are allocated among different investments
depending upon worldwide market and economic conditions.
We are pleased to report that the Fund provided a total return of 18.93% for the
12-month period ended December 31, 1996, as discussed in the Performance Summary
on page 19. This return was in part the result of its high exposure to the
financial sector, which benefited from low global interest rates. Our
underweighting in poorly performing markets, particularly Japan, also aided the
Fund's performance. 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.
U.S. equity markets strengthened appreciably in 1996 due to subdued inflation,
rising corporate earnings, and moderate economic growth. The banking sector
performed particularly well, prompting us to sell our shares of MBNA Corp.,
Chase Manhattan Bank, and Barnett Banks Inc. at a profit. The telecommunications
sector also rebounded following passage by Congress of the Telecommunications
Bill, which enables companies to enter new markets and offer customers one-stop
shopping for their communication needs. In our opinion, the Fund's holdings of
AT&T Corp. and Lucent Technologies Inc. should benefit from this regulation.
In Europe, lower interest rates and improved fiscal and monetary policies caused
many equity markets to rise during the fiscal year. At the end of the reporting
period, the Fund's largest European country weightings were Spain, Norway,
Sweden, and the Netherlands -- four nations whose stock markets each increased
more than 25% in U.S. dollar terms in 1996(1). Among the Fund's largest equity
holdings, the share price of Telefonica de Espana SA appreciated more than 65%
and Rhone-Poulenc SA 59.5%. During the reporting period, we initiated positions
in British Gas PLC and Komercni Banka SA, and added to our holdings of Banque
Nationale de Paris, because we believe these companies are well positioned
within their markets and will provide solid long-term performance.
TEMPLETON ASSET ALLOCATION FUND
Asset Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART]
Stocks 67.1%
Bonds 24.9%
Short-Term Obligations &
Other Net Assets 8.0%
Latin American equity markets rebounded strongly in 1996 as a result of improved
economic fundamentals and renewed interest from foreign investors. We
participated in the strong performing telecommunications sector through our
holdings of Brazil's Telebras-Telecomunicacoes Brasileiras SA. Believing that
demand for utility services will continue to grow, we purchased shares of
Telefonica del Peru during the period.
Although some Asian stock markets performed poorly in 1996 because of slowing
economies and weakening currencies, Hong Kong's market rose 37.5%, as concerns
about China's takeover in 1997 faded and investors focused on growth
17
<PAGE> 19
prospects of Hong Kong companies with established operations in China(1). The
rising share price of HSBC Holdings PLC, the holding company for Hong Kong Bank,
with over 400 offices worldwide, provided a significant gain for the Fund. The
Fund also benefited from its limited exposure to Japan, whose stock market
declined more than 12% in U.S. dollar terms during 1996(2). Our Japanese
holdings represented less than 1% of total net assets at the end of the period,
compared to a 17.5% weighting in the Morgan Stanley Capital International(R)(3)
World Index. Based on standard measures such as price/earnings ratios, we
believe that Japanese stocks remain among the world's most expensive, and we do
not anticipate purchasing additional Japanese equities unless their valuations
fall substantially.
With regard to debt securities, global bond markets provided mixed results.
Although investor concerns about accelerating U.S. economic growth and
potentially higher interest rates caused domestic bond prices to decline
slightly, European bond markets rallied sharply, as central banks there lowered
interest rates in an effort to stimulate economic growth. 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, diminishing 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.
Responding to these conditions, we made significant changes to the Fund's
fixed-income asset allocation. The changes fell into three broad categories: a
shift toward U.S. dollar exposures away from European currencies; a shift in the
Fund's European exposure from core markets like Germany and France to smaller
markets like Italy and Spain; and a shift out of the Japanese market.
TEMPLETON ASSET ALLOCATION FUND
Geographic Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART] Europe 38.4%
United States 31.1%
Latin America 8.2%
Australia/
New Zealand 6.3%
Asia 5.4%
Canada 2.6%
Short-Term
Obligations & Other
Net Assets 8.0%
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.
(1) PRICE APPRECIATION INCLUDES REINVESTED DIVIDENDS.
(2) PRICE DEPRECIATION INCLUDES REINVESTED DIVIDENDS.
(3) A REGISTERED TRADEMARK OF MORGAN STANLEY AND CO., INC. TOTAL RETURN INCLUDES
REINVESTED DIVIDENDS. ONE CANNOT INVEST DIRECTLY IN AN INDEX.
18
<PAGE> 20
PERFORMANCE
SUMMARY
The Templeton Asset Allocation Fund delivered a total return of 18.93% 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 ASSET ALLOCATION 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) 18.93% 14.01% 12.30%
Cumulative
Total Return(2) 18.93% 92.67% 163.57%
Value of $10,000
Investment(3) $11,893 $19,267 $26,357
</TABLE>
One-Year Total Return(4)
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
8.42% 26.12% -2.96% 22.48% 18.93%
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.
IMPORTANT NOTICE
At a special meeting held on February 10, 1997, the shareholders of the
Templeton Asset Allocation 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: 0.65% up to $200 million, 0.585% up to $1.3 billion and 0.52% over
$1.3 billion (based on average daily net assets of the Fund). The New
Agreement will be effective on May 1, 1997.
19
<PAGE> 21
The graph below shows how a $10,000 investment in the Fund since inception has
outperformed the unmanaged Morgan Stanley Capital International (MSCI) World
Index and J.P. Morgan Global Government Bond 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 the indices because the indices
do not contain cash (the Fund generally carries a certain percentage of cash at
any given time) and include 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 J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX INCLUDES ONLY ACTIVELY TRADED
FIXED-RATE BONDS WITH A REMAINING MATURITY OF ONE YEAR OR LONGER.
IT IS AN AGGREGATE OF GOVERNMENT SECURITIES ISSUED IN 13 COUNTRIES.
**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 ASSET ALLOCATION FUND
Total Return Index Comparison - $10,000 Investment (8/24/88-12/31/96)
[LINE GRAPH]
<TABLE>
<CAPTION>
Templeton Asset Allocation Fund MSCI World Index JPM Global GovernmentBond CPI
<S> <C> <C> <C> <C> <C> <C>
8/24/88 $10,000 $10,000 $10,000 $10,000
8/31/88 $10,000 -1.24% $ 9,876 $ 9,984 0.09% $10,009
9/30/88 $10,070 4.26% $10,297 $10,247 0.67% $10,077
10/31/88 $10,380 6.67% $10,984 $10,650 0.33% $10,110
11/30/88 $10,320 3.50% $11,368 $10,745 0.08% $10,118
12/31/88 $10,280 0.92% $11,473 $10,680 0.17% $10,135
1/31/89 $10,560 3.64% $11,890 $10,574 0.50% $10,186
2/28/89 $10,440 -0.61% $11,818 $10,557 0.41% $10,228
3/31/89 $10,550 -0.62% $11,745 $10,467 0.58% $10,287
4/30/89 $10,781 2.32% $12,017 $10,640 0.65% $10,354
5/31/89 $10,781 -2.44% $11,724 $10,525 0.57% $10,413
6/30/89 $10,721 -1.11% $11,594 $10,764 0.24% $10,438
7/31/89 $11,302 11.32% $12,906 $11,193 0.24% $10,463
8/31/89 $11,402 -2.40% $12,596 $10,862 0.16% $10,480
9/30/89 $11,352 2.84% $12,954 $11,033 0.32% $10,513
10/31/89 $10,971 -3.32% $12,524 $11,175 0.48% $10,564
11/30/89 $11,161 4.01% $13,026 $11,275 0.24% $10,589
12/31/89 $11,642 3.23% $13,447 $11,406 0.16% $10,606
1/31/90 $11,352 -4.65% $12,822 $11,236 1.03% $10,715
2/28/90 $11,372 -4.27% $12,274 $11,115 0.47% $10,765
3/31/90 $11,535 -6.02% $11,535 $11,047 0.55% $10,825
4/30/90 $11,134 -1.42% $11,372 $11,003 0.16% $10,842
5/31/90 $11,823 10.55% $12,571 $11,355 0.23% $10,867
6/30/90 $11,915 -0.70% $12,483 $11,561 0.54% $10,926
7/31/90 $12,090 0.93% $12,599 $11,900 0.38% $10,967
8/31/90 $11,206 -9.34% $11,423 $11,808 0.92% $11,068
9/30/90 $10,302 -10.53% $10,220 $11,918 0.84% $11,161
10/31/90 $10,210 9.36% $11,176 $12,389 0.60% $11,228
11/30/90 $10,508 -1.62% $10,995 $12,607 0.22% $11,253
12/31/90 $10,713 2.11% $11,227 $12,747 0.00% $11,253
1/31/91 $11,227 3.68% $11,640 $13,036 0.60% $11,320
2/28/91 $11,946 9.27% $12,720 $13,049 0.15% $11,337
3/31/91 $11,801 -2.93% $12,347 $12,642 0.15% $11,354
4/30/91 $11,939 0.80% $12,446 $12,794 0.15% $11,371
5/31/91 $12,268 2.28% $12,729 $12,805 0.30% $11,405
6/30/91 $11,748 -6.16% $11,945 $12,634 0.29% $11,438
7/31/91 $12,427 4.74% $12,511 $12,901 0.15% $11,455
8/31/91 $12,714 -0.30% $12,474 $13,169 0.29% $11,489
9/30/91 $12,820 2.64% $12,803 $13,649 0.44% $11,539
10/31/91 $12,916 1.64% $13,013 $13,784 0.15% $11,557
11/30/91 $12,597 -4.34% $12,448 $14,009 0.29% $11,590
12/31/91 $13,680 7.30% $13,357 $14,717 0.07% $11,598
1/31/92 $13,563 -1.83% $13,113 $14,429 0.15% $11,616
2/29/92 $13,934 -1.71% $12,888 $14,387 0.36% $11,657
3/31/92 $13,766 -4.69% $12,284 $14,254 0.51% $11,717
4/30/92 $14,116 1.41% $12,457 $14,372 0.14% $11,733
5/31/92 $14,708 4.00% $12,956 $14,780 0.14% $11,750
6/30/92 $14,664 -3.33% $12,524 $15,184 0.36% $11,792
7/31/92 $14,840 0.27% $12,558 $15,518 0.21% $11,817
8/31/92 $14,664 2.45% $12,866 $15,931 0.28% $11,850
9/30/92 $14,610 -0.90% $12,750 $15,915 0.28% $11,883
10/31/92 $14,500 -2.69% $12,407 $15,518 0.35% $11,925
11/30/92 $14,610 1.81% $12,631 $15,243 0.14% $11,941
12/31/92 $14,785 0.83% $12,736 $15,387 -0.07% $11,933
1/31/93 $14,982 0.35% $12,781 $15,648 0.49% $11,991
2/28/93 $15,333 2.39% $13,086 $15,900 0.35% $12,033
3/31/93 $15,650 5.82% $13,848 $16,144 0.35% $12,075
4/30/93 $15,954 4.65% $14,492 $16,438 0.28% $12,109
5/31/93 $16,225 2.32% $14,828 $16,542 0.14% $12,126
6/30/93 $16,360 -0.82% $14,706 $16,556 0.14% $12,143
7/31/93 $16,619 2.08% $15,012 $16,563 0.00% $12,143
8/31/93 $17,408 4.60% $15,703 $17,053 0.28% $12,177
9/30/93 $17,419 -1.83% $15,416 $17,234 0.21% $12,203
10/31/93 $18,005 2.77% $15,843 $17,225 0.41% $12,253
11/30/93 $17,656 -5.64% $14,949 $17,099 0.07% $12,261
12/31/93 $18,647 4.91% $15,683 $17,274 0.00% $12,261
1/31/94 $19,549 6.61% $16,720 $17,437 0.27% $12,295
2/28/94 $18,816 -1.28% $16,506 $17,246 0.34% $12,336
3/31/94 $17,991 -4.29% $15,798 $17,167 0.34% $12,378
4/30/94 $18,152 3.11% $16,289 $17,153 0.14% $12,396
5/31/94 $18,279 0.27% $16,333 $17,011 0.07% $12,404
6/30/94 $17,783 -0.27% $16,289 $17,213 0.34% $12,446
7/31/94 $18,498 1.92% $16,601 $17,375 0.27% $12,480
8/31/94 $19,017 3.02% $17,103 $17,331 0.40% $12,530
9/30/94 $18,625 -2.61% $16,656 $17,416 0.27% $12,564
10/31/94 $18,821 2.87% $17,135 $17,677 0.07% $12,573
11/30/94 $18,221 -4.32% $16,394 $17,454 0.13% $12,589
12/31/94 $18,095 0.99% $16,557 $17,495 0.00% $12,589
1/31/95 $17,899 -1.48% $16,312 $17,849 0.40% $12,639
2/28/95 $18,302 1.48% $16,553 $18,309 0.40% $12,690
3/31/95 $18,586 4.84% $17,354 $19,240 0.33% $12,732
4/30/95 $19,190 3.51% $17,963 $19,547 0.33% $12,774
5/31/95 $19,900 0.87% $18,120 $20,092 0.20% $12,799
6/30/95 $20,255 -0.01% $18,118 $20,218 0.20% $12,825
7/31/95 $21,013 5.02% $19,027 $20,314 0.00% $12,825
8/31/95 $20,836 -2.21% $18,607 $19,749 0.26% $12,858
9/30/95 $21,522 2.93% $19,152 $20,194 0.20% $12,884
10/31/95 $21,096 -1.56% $18,853 $20,391 0.33% $12,926
11/30/95 $21,747 3.49% $19,511 $20,619 -0.07% $12,917
12/31/95 $22,173 2.94% $20,085 $20,874 -0.07% $12,908
1/31/96 $22,742 1.83% $20,452 $20,660 0.59% $12,985
2/29/96 $22,931 0.63% $20,581 $20,539 0.32% $13,026
3/31/96 $23,143 1.68% $20,927 $20,508 0.52% $13,094
4/30/96 $23,706 2.37% $21,423 $20,432 0.39% $13,145
5/31/96 $24,031 0.10% $21,444 $20,453 0.19% $13,170
6/30/96 $23,994 0.52% $21,556 $20,631 0.06% $13,178
7/31/96 $23,369 -3.52% $20,797 $21,011 0.19% $13,203
8/31/96 $23,944 1.17% $21,040 $21,099 0.19% $13,228
9/30/96 $24,419 3.93% $21,867 $21,214 0.32% $13,270
10/31/96 $24,719 0.72% $22,025 $21,636 0.32% $13,313
11/30/96 $26,182 5.62% $23,263 $21,816 0.19% $13,338
12/31/96 $26,357 -1.58% $22,895 $21,794 0.00% $13,338
</TABLE>
Templeton Asset Allocation Fund(1) MCSI World Index(2)
J.P. Morgan Global Government Bond Index(2) Consumer Price Index(3)
AVERAGE ANNUAL TOTAL RETURN(4)
1-Year: 18.93% 5-Year: 14.01%
Since Inception: 12.30%
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. Indices are unmanaged and include reinvested dividends or interest.
3. Source: U.S. Bureau of Labor Statistics.
4. See footnote 1 on page 19.
20
<PAGE> 22
TEMPLETON
BOND FUND
The Templeton Bond Fund seeks high current income through a flexible policy of
investing primarily in debt securities of companies, governments and government
agencies of various nations throughout the world.
The year began with many investors convinced that U.S. economic growth would
remain slow in the foreseeable future and that domestic interest rates would
decline. In an apparent attempt to stimulate growth, the Federal Reserve Board
lowered its federal funds rate from 5.50% to 5.25% in January. Shortly
thereafter, the economy began showing signs of strength. By the end of March,
consumer confidence and industrial production had risen, and gross domestic
product (GDP) was growing at an annualized rate of 1.7%. As the economy
continued to strengthen in the second quarter, long-term interest rates rose,
and the 10-year U.S. Treasury bond's yield climbed from 5.58% on December 31,
1995 to 6.73% on June 30, 1996.
Although economic growth in Europe was weaker than in the U.S., interest rates
also rose in many European nations during the first half of 1996. In Germany,
for example, GDP increased at an annualized rate of only 0.3% in the first
quarter and 1.1% in the second quarter, but the 10-year German government bond's
yield rose from 6.03% on December 31, 1995 to 6.51% at the end of June. This was
surprising to us, not only because of Europe's relatively weak economic
conditions, but also because many central banks had undertaken policies to lower
interest rates in an effort to stimulate their domestic economies.
The second half of the fiscal year presented a different picture. Many bond
investors became confident that global economic growth did not portend rising
inflation and higher interest rates. In the U.S., the 10-year Treasury bond
yield peaked at 7.06% on July 5, and fell to 6.43% by the end of the year. In
Germany, Australia, and Canada, 10-year government bond yields also declined
during the last six months of 1996.
TEMPLETON BOND FUND
Geographic Distribution on 12/31/96
Based on Total Net Assets
[PIE CHART]
Europe 38.3%
United States 31.0%
Australia/New Zealand 11.1%
Latin America 8.3%
Canada 4.4%
Asia 0.8%
Short-Term Obligations &
Other Net Assets 6.1%
The changing value of the U.S. dollar 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.
During the fiscal year, we adopted three strategies. First, we decreased our
exposure to bonds denominated in foreign currencies because we believed that
most of these currencies were likely to depreciate versus the U.S. dollar over
the course of the reporting period. Second, we shifted Fund assets from Germany
and France to the United Kingdom, Italy and Ireland because we believed that
these countries' currencies were likely to appreciate versus the U.S. dollar.
Third, we eliminated
21
<PAGE> 23
our position in Japan because we felt that the bond markets there were unlikely
to offer attractive returns.
On December 31, 1996, approximately 93.9% of the Fund's portfolio was invested
in bonds and 6.1% in short-term obligations and other net assets. The portfolio
consisted primarily of investment-grade securities, as rated by one of the
nationally recognized rating services, or of non-rated securities we judged to
be equivalent in quality. At the end of the period, 83.5% of the debt securities
in the Fund's portfolio were graded AA or higher, 5.2% were A or BBB, 8.5% were
below investment grade, and 2.8% were not rated. The lower-rated bonds
represented obligations of Argentina, Brazil, Mexico, and India.
Looking forward, we are optimistic about global fixed-income markets. In our
opinion, most economies may continue to grow moderately while worldwide
inflation levels remain subdued. We find European bond markets to be
particularly attractive and believe that interest rates there could decline
further in 1997. Of course, there are 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 BOND FUND
Portfolio Breakdown on 12/31/96
Based on Total Net Assets
<TABLE>
<S> <C>
Government Bonds 82.5%
Corporate Bonds 11.4%
Short-Term Obligations &
Other Net Assets 6.1%
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 43 OF THIS REPORT.
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.
22
<PAGE> 24
PERFORMANCE
SUMMARY
The Templeton Bond Fund delivered a total return of 9.45% 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 BOND 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) 9.45% 7.07% 8.00%
Cumulative
Total Return(2) 9.45% 40.73% 90.19%
</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.
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.
23
<PAGE> 25
The graph below shows how an investment in the Fund, since its inception, has
kept your purchasing power ahead of inflation, as measured by the Consumer Price
Index (CPI).* It also compares the Fund's performance with that of the unmanaged
J.P. Morgan Global Government Bond Index.** 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 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.
**THE J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX INCLUDES ONLY ACTIVELY TRADED
FIXED-RATE BONDS WITH A REMAINING MATURITY OF ONE YEAR OR LONGER. IT IS AN
AGGREGATE OF GOVERNMENT SECURITIES ISSUED IN 13 COUNTRIES.
TEMPLETON BOND FUND
Total Return Index Comparison - $10,000 Investment (8/24/88-12/31/96)
[LINE GRAPH]
<TABLE>
<CAPTION>
Templeton Bond Fund JPM Global Government Bond Index CPI
<S> <C> <C> <C> <C> <C>
8/24/88 $ 10,000 $ 10,000 $ 10,000
8/31/88 $ 10,000 -0.16% $ 9,984 0.09% $ 10,009
9/30/88 $ 10,060 2.63% $ 10,247 0.67% $ 10,077
10/31/88 $ 10,100 3.94% $ 10,650 0.33% $ 10,110
11/30/88 $ 10,150 0.88% $ 10,745 0.08% $ 10,118
12/31/88 $ 10,190 -0.60% $ 10,680 0.17% $ 10,135
1/31/89 $ 10,240 -0.99% $ 10,574 0.50% $ 10,186
2/28/89 $ 10,210 -0.16% $ 10,557 0.41% $ 10,228
3/31/89 $ 10,367 -0.85% $ 10,467 0.58% $ 10,287
4/30/89 $ 10,429 1.65% $ 10,640 0.65% $ 10,354
5/31/89 $ 10,459 -1.08% $ 10,525 0.57% $ 10,413
6/30/89 $ 10,561 2.27% $ 10,764 0.24% $ 10,438
7/31/89 $ 10,684 3.98% $ 11,193 0.24% $ 10,463
8/31/89 $ 10,704 -2.96% $ 10,862 0.16% $ 10,480
9/30/89 $ 10,735 1.58% $ 11,033 0.32% $ 10,513
10/31/89 $ 10,837 1.29% $ 11,175 0.48% $ 10,564
11/30/89 $ 10,929 0.89% $ 11,275 0.24% $ 10,589
12/31/89 $ 10,970 1.17% $ 11,406 0.16% $ 10,606
1/31/90 $ 10,874 -1.49% $ 11,236 1.03% $ 10,715
2/28/90 $ 10,885 -1.08% $ 11,115 0.47% $ 10,765
3/31/90 $ 10,895 -0.61% $ 11,047 0.55% $ 10,825
4/30/90 $ 10,789 -0.39% $ 11,003 0.16% $ 10,842
5/31/90 $ 11,055 3.20% $ 11,355 0.23% $ 10,867
6/30/90 $ 11,204 1.81% $ 11,561 0.54% $ 10,926
7/31/90 $ 11,321 2.94% $ 11,900 0.38% $ 10,967
8/31/90 $ 11,193 -0.78% $ 11,808 0.92% $ 11,068
9/30/90 $ 11,257 0.94% $ 11,918 0.84% $ 11,161
10/31/90 $ 11,396 3.95% $ 12,389 0.60% $ 11,228
11/30/90 $ 11,566 1.76% $ 12,607 0.22% $ 11,253
12/31/90 $ 11,664 1.11% $ 12,747 0.00% $ 11,253
1/31/91 $ 11,844 2.27% $ 13,036 0.60% $ 11,320
2/28/91 $ 11,901 0.10% $ 13,049 0.15% $ 11,337
3/31/91 $ 11,968 -3.12% $ 12,642 0.15% $ 11,354
4/30/91 $ 12,059 1.21% $ 12,794 0.15% $ 11,371
5/31/91 $ 12,138 0.09% $ 12,805 0.30% $ 11,405
6/30/91 $ 12,070 -1.34% $ 12,634 0.29% $ 11,438
7/31/91 $ 12,205 2.11% $ 12,901 0.15% $ 11,455
8/31/91 $ 12,533 2.08% $ 13,169 0.29% $ 11,489
9/30/91 $ 12,815 3.65% $ 13,649 0.44% $ 11,539
10/31/91 $ 12,996 0.99% $ 13,784 0.15% $ 11,557
11/30/91 $ 13,154 1.63% $ 14,009 0.29% $ 11,590
12/31/91 $ 13,514 5.05% $ 14,717 0.07% $ 11,598
1/31/92 $ 13,195 -1.96% $ 14,429 0.15% $ 11,616
2/29/92 $ 13,219 -0.29% $ 14,387 0.36% $ 11,657
3/31/92 $ 13,096 -0.92% $ 14,254 0.51% $ 11,717
4/30/92 $ 13,145 0.83% $ 14,372 0.14% $ 11,733
5/31/92 $ 13,453 2.84% $ 14,780 0.14% $ 11,750
6/30/92 $ 13,773 2.73% $ 15,184 0.36% $ 11,792
7/31/92 $ 14,178 2.20% $ 15,518 0.21% $ 11,817
8/31/92 $ 14,301 2.66% $ 15,931 0.28% $ 11,850
9/30/92 $ 14,252 -0.10% $ 15,915 0.28% $ 11,883
10/31/92 $ 14,141 -2.50% $ 15,518 0.35% $ 11,925
11/30/92 $ 14,055 -1.77% $ 15,243 0.14% $ 11,941
12/31/92 $ 14,262 0.94% $ 15,387 -0.07% $ 11,933
1/31/93 $ 14,550 1.70% $ 15,648 0.49% $ 11,991
2/28/93 $ 14,929 1.61% $ 15,900 0.35% $ 12,033
3/31/93 $ 14,942 1.54% $ 16,144 0.35% $ 12,075
4/30/93 $ 15,007 1.82% $ 16,438 0.28% $ 12,109
5/31/93 $ 15,020 0.63% $ 16,542 0.14% $ 12,126
6/30/93 $ 15,256 0.08% $ 16,556 0.14% $ 12,143
7/31/93 $ 15,491 0.04% $ 16,563 0.00% $ 12,143
8/31/93 $ 15,740 2.96% $ 17,053 0.28% $ 12,177
9/30/93 $ 15,675 1.06% $ 17,234 0.21% $ 12,203
10/31/93 $ 15,832 -0.05% $ 17,225 0.41% $ 12,253
11/30/93 $ 15,609 -0.73% $ 17,099 0.07% $ 12,261
12/31/93 $ 15,897 1.02% $ 17,274 0.00% $ 12,261
1/31/94 $ 16,211 0.94% $ 17,437 0.27% $ 12,295
2/28/94 $ 15,701 -1.10% $ 17,246 0.34% $ 12,336
3/31/94 $ 15,177 -0.46% $ 17,167 0.34% $ 12,378
4/30/94 $ 15,107 -0.08% $ 17,153 0.14% $ 12,396
5/31/94 $ 15,023 -0.83% $ 17,011 0.07% $ 12,404
6/30/94 $ 14,940 1.19% $ 17,213 0.34% $ 12,446
7/31/94 $ 15,023 0.94% $ 17,375 0.27% $ 12,480
8/31/94 $ 15,051 -0.26% $ 17,331 0.40% $ 12,530
9/30/94 $ 15,051 0.49% $ 17,416 0.27% $ 12,564
10/31/94 $ 15,232 1.50% $ 17,677 0.07% $ 12,573
11/30/94 $ 15,135 -1.26% $ 17,454 0.13% $ 12,589
12/31/94 $ 15,121 0.23% $ 17,495 0.00% $ 12,589
1/31/95 $ 15,204 2.02% $ 17,849 0.40% $ 12,639
2/28/95 $ 15,490 2.58% $ 18,309 0.40% $ 12,690
3/31/95 $ 15,753 5.09% $ 19,240 0.33% $ 12,732
4/30/95 $ 16,060 1.59% $ 19,547 0.33% $ 12,774
5/31/95 $ 16,470 2.79% $ 20,092 0.20% $ 12,799
6/30/95 $ 16,528 0.62% $ 20,218 0.20% $ 12,825
7/31/95 $ 16,587 0.47% $ 20,314 0.00% $ 12,825
8/31/95 $ 16,470 -2.78% $ 19,749 0.26% $ 12,858
9/30/95 $ 16,733 2.25% $ 20,194 0.20% $ 12,884
10/31/95 $ 17,011 0.98% $ 20,391 0.33% $ 12,926
11/30/95 $ 17,114 1.11% $ 20,619 -0.07% $ 12,917
12/31/95 $ 17,377 1.24% $ 20,874 -0.07% $ 12,908
1/31/96 $ 17,274 -1.03% $ 20,660 0.59% $ 12,985
2/29/96 $ 17,187 -0.58% $ 20,539 0.32% $ 13,026
3/31/96 $ 17,236 -0.15% $ 20,508 0.52% $ 13,094
4/30/96 $ 17,334 -0.37% $ 20,432 0.39% $ 13,145
5/31/96 $ 17,416 0.10% $ 20,453 0.19% $ 13,170
6/30/96 $ 17,629 0.87% $ 20,631 0.06% $ 13,178
7/31/96 $ 17,694 1.84% $ 21,011 0.19% $ 13,203
8/31/96 $ 17,923 0.42% $ 21,099 0.19% $ 13,228
9/30/96 $ 18,152 0.55% $ 21,214 0.32% $ 13,270
10/31/96 $ 18,528 1.99% $ 21,636 0.32% $ 13,313
11/30/96 $ 18,986 0.83% $ 21,816 0.19% $ 13,338
12/31/96 $ 19,019 -0.10% $ 21,794 0.00% $ 13,338
</TABLE>
Templeton Bond Fund(1) J.P. Morgan Global Government Bond Index(2)
Consumer Price Index(3)
AVERAGE ANNUAL TOTAL RETURN(4)
1-Year: 9.45% 5-Year: 7.07%
Since Inception: 8.00%
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 interest.
3. Source: U.S. Bureau of Labor Statistics.
4. See footnote 1 on page 23.
24
<PAGE> 26
TEMPLETON
MONEY MARKET
FUND
The 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 Fund may invest in short-term U.S. government
securities, certificates of deposit, time deposits, bankers' acceptances,
commercial paper and repurchase agreements.*
On December 31, 1996, the Fund's 7-day annualized yield was 4.73%, the 30-day
annualized yield was 4.93%, and the average maturity of the portfolio was
approximately 27 days. Approximately 95.8% of the portfolio was invested in
government agency paper, 1.7% in repurchase agreements collateralized by U.S.
Treasury notes, and 2.5% in other assets.
In January 1996, apparently responding to prospects for continued slow economic
growth and low inflation, the Federal Reserve Board lowered the federal funds
rate from 5.50% to 5.25%. During the rest of the fiscal year, unemployment was
low, but consumer demand fluctuated and retail sales were relatively weak, as
U.S. gross domestic product grew at an annualized rate of 2.5% for the reporting
period. Prices, as measured by the Consumer Price Index, rose slightly primarily
because of higher energy costs. Apparently unable to find any sustainable
evidence of increasing inflation, the Federal Open Market Committee left
monetary policy unchanged throughout the remainder of the year.
Looking forward, we believe that the economy may continue to grow steadily, and
inflation should remain under control in the first half of 1997. We intend to
keep the Fund's portfolio in diversified and highly liquid investments while
maintaining a relatively short average maturity in anticipation of any future
interest-rate hikes and to meet the cash needs of our shareholders.
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.
*PLEASE REMEMBER THAT AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT, AND THAT THERE CAN BE NO ASSURANCE THAT THE
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
25
<PAGE> 27
TEMPLETON VARIABLE PRODUCTS SERIES FUND
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.
26
<PAGE> 28
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
------------
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>
27
<PAGE> 29
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
------------
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.
28
<PAGE> 30
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1992
YEAR ENDED DECEMBER 31 (COMMENCEMENT
-------------------------------------- OF OPERATIONS) TO
1996 1995 1994 1993 DECEMBER 31, 1992
-------- -------- -------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.13 $ 13.22 $ 13.83 $ 9.39 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .43 .23 .12 .10 .06
Net realized and unrealized gain (loss) 3.15 1.83 (.42) 4.34 (.67)
-------- -------- -------- -------- --------
Total from investment operations 3.58 2.06 (.30) 4.44 (.61)
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income (.24) (.10) (.08) -- --
Distributions from net realized gains (.07) (.05) (.23) -- --
-------- -------- -------- -------- --------
Total distributions (.31) (.15) (.31) -- --
-------- -------- -------- -------- --------
Change in net asset value 3.27 1.91 (.61) 4.44 (.61)
-------- -------- -------- -------- --------
Net asset value, end of year $ 18.40 $ 15.13 $ 13.22 $ 13.83 $ 9.39
======== ======== ======== ======== ========
TOTAL RETURN* 24.04% 15.78% (2.22)% 47.28% (6.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $682,984 $353,141 $150,090 $43,877 $ 7,050
Ratio of expenses to average net assets .65% .71% .83% .95% 1.40%**
Ratio of expenses, net of reimbursement, to average net assets .65% .71% .83% .95% 1.00%**
Ratio of net investment income to average net assets 3.23% 2.36% 1.89% 1.62% 1.76%**
Portfolio turnover rate 9.46% 5.19% 6.32% 15.65% 4.50%
Average commission rate paid (per share) $ .004
</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.
** ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE> 31
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS: 86.4%
APPLIANCES & HOUSEHOLD DURABLES: 0.4%
Email Ltd. 432,000 $ 1,397,536
Sony Corp. 21,000 1,376,306
------------
2,773,842
------------
AUTOMOBILES: 4.6%
Fiat Spa 2,775,000 8,367,101
Regie Nationale des Usines Renault SA 296,000 6,365,285
Volkswagen AG 15,600 6,479,298
Volvo AB, B 455,000 10,040,910
------------
31,252,594
------------
BANKING: 16.6%
ABN AMRO NV 99,050 6,448,433
Argentaria Corporacion Bancaria de
Espana SA 135,600 6,068,446
Argentaria Corporacion Bancaria de
Espana SA, ADR 7,300 164,250
Australia & New Zealand Banking Group
Ltd. 1,037,510 6,539,587
Banco Bilbao Vizcaya 9,000 485,962
Banco Popular Espanol SA 16,000 3,142,692
Bangkok Bank Public Co. Ltd., fgn. 373,800 3,614,692
Bankinter SA 32,000 4,961,756
Banque Nationale de Paris 185,000 7,164,513
Banque Nationale de Paris, ADR, 144A 11,800 456,980
Barclays PLC 30,200 517,612
Canadian Imperial Bank of Commerce 160,000 7,062,174
Credit Suisse Group, reg. 10,000 1,027,269
Daegu Bank Co. Ltd. 40,000 477,628
Den Norske Bank 1,880,000 7,221,700
HSBC Holdings PLC 35,800 7,660,353
*Merita Ltd., A 3,400,000 10,569,565
National Bank of Canada 440,000 4,449,637
National Westminster Bank PLC 777,299 9,128,010
PT Bank Bali, fgn. 1,425,000 3,559,483
PT Panin Bank, fgn. 250,000 285,775
Shinhan Bank Co. Ltd. 30,600 489,849
Sparbanken Sverige AB, A, 144A 152,000 2,607,682
Stadshypotek AB, A 375,000 10,282,484
Svenska Handelsbanken, A 48,000 1,379,503
Unidanmark AS, A 150,000 7,768,721
------------
113,534,756
------------
BROADCASTING & PUBLISHING: 0.4%
News Corp. Ltd., ADR 125,200 2,613,550
------------
BUILDING MATERIALS & COMPONENTS: 0.4%
*Cementos Paz del Rio SA, ADR, 144A 21,000 267,750
Cie de Saint Gobain 18,517 2,621,307
------------
2,889,057
------------
CHEMICALS: 4.8%
Akzo Nobel NV 58,000 7,928,178
DSM NV 16,000 1,579,149
European Vinyls Corp. EVC
International NV 50,000 1,587,026
Kemira OY, 144A 563,632 $ 7,106,664
Rhone-Poulenc SA, A 279,800 9,546,118
Solvay SA 8,100 4,959,184
------------
32,706,319
------------
DATA PROCESSING & REPRODUCTION: 0.7%
*Newbridge Networks Corp. 180,000 5,085,000
------------
ELECTRICAL & ELECTRONICS: 3.3%
ABB AG, br. 4,000 4,975,719
Alcatel Alsthom SA 72,000 5,787,773
Hitachi Ltd. 500,000 4,662,810
Philips Electronics NV 168,000 6,811,468
------------
22,237,770
------------
ELECTRONIC COMPONENTS &
INSTRUMENTS: 0.7%
BICC 1,000,000 4,745,263
------------
ENERGY EQUIPMENT & SERVICES: 0.3%
Koninklijke Pakhoed NV 55,000 1,720,243
------------
ENERGY SOURCES: 2.5%
Repsol SA 2,500 95,898
Societe Elf Aquitane SA 87,200 7,943,020
Total SA, B 70,000 5,697,204
YPF Sociedad Anonima, ADR 144,700 3,653,675
------------
17,389,797
------------
FINANCIAL SERVICES: 2.0%
Invesco PLC 805,000 3,578,605
Julius Baer Holdings AG 5,100 5,345,760
Korea Fund Inc. 47,229 708,435
Leichtenstein Global Trust AG 6,500 3,331,341
London Pacific Group Ltd. 23,600 84,699
Peregrine Investments Holdings Ltd. 300,000 513,931
------------
13,562,771
------------
FOOD & HOUSEHOLD PRODUCTS: 1.7%
Burns Philp & Co. Ltd. 1,878,200 3,344,065
*Grupo Embotellador de Mexico SA de
CV, GDR 38,200 319,925
*Grupo Embotellador de Mexico SA, B 250,800 366,387
Northern Foods PLC 2,183,100 7,647,993
------------
11,678,370
------------
FOREST PRODUCTS & PAPER: 6.4%
*Asia Pulp & Paper Co. Ltd., ADR 369,600 4,204,200
Assidomaen AB 135,100 3,763,866
Cartiere Burgo SPA 21,600 99,736
*Enso OY, R 200,000 1,621,739
Fletcher Challenge Ltd. Forestry
Division 6,166,000 10,330,937
Metsa Serla OY, B 402,250 3,016,875
Munksjo AB 70,000 708,227
Norske Skogindustrier AS, A 176,400 5,932,549
</TABLE>
30
<PAGE> 32
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER: (cont.)
Sappi Ltd. 415,000 $ 3,725,553
Stora Kopparbergs Bergslags AB, B 300,000 4,090,999
*UPM-Kymmene Corp. 300,000 6,293,478
------------
43,788,159
------------
HEALTH & PERSONAL CARE: 3.5%
Astra AB, A 30,000 1,482,437
Astra AB, B 52,000 2,508,560
*Novartis A.G. 4,267 4,886,661
*Nycomed ASA, B 265,000 4,071,809
Pharmacia & Upjohn 119,800 4,747,075
Smithkline Beecham PLC, A 90,000 6,156,000
------------
23,852,542
------------
INDUSTRIAL COMPONENTS: 0.5%
SKF AB, B 135,900 3,218,231
------------
INSURANCE: 4.9%
Baloise-Holding 1,600 3,215,540
GIO Austrailia Holdings Ltd. 3,280,000 8,394,881
Ing Groep NV 112,500 4,052,997
London Insurance Group Inc. 100,000 1,328,904
Partnerre Ltd. 269,000 9,146,000
Skandia Foersaekrings AB, free 270,000 7,640,931
------------
33,779,253
------------
MACHINERY & ENGINEERING: 0.2%
Valmet (OY) 78,000 1,363,304
------------
MERCHANDISING: 2.6%
*Cifra SA, B 2,470,000 3,012,195
Dairy Farm International Holdings Ltd. 839,000 675,395
Koninklijke Bijenkorf Beheer NV (KBB) 80,300 5,790,530
Safeway PLC 1,200,000 8,305,067
------------
17,783,187
------------
METALS & MINING: 1.6%
Boehler Uddeholm AG 27,210 1,947,071
Boehler Uddeholm AG, 144A 33,800 2,418,633
Companhia Siderurgica Nacional 12,700,000 360,552
Maanshan Iron & Steel Co. Ltd., H 1,000,000 214,623
Pechiney SA, A 134,145 5,624,517
SIG (Schweizerische Industrie
Gesellschaft) Holdings AG 160 405,230
------------
10,970,626
------------
MULTI-INDUSTRY: 4.7%
BTR PLC 2,400,000 11,676,431
Cheung Kong Holdings Ltd. 850,000 7,555,433
Hutchison Whampoa Ltd. 600,000 4,712,651
Jardine Matheson Holdings Ltd. 566,800 3,740,880
Jardine Strategic Holdings Ltd. 225,000 $ 814,500
Swire Pacific Ltd., A 400,000 3,814,080
------------
32,313,975
------------
REAL ESTATE: 0.4%
*Fastighets AB Tornet, A 15,200 231,794
Hang Lung Development Co. Ltd. 700,000 1,538,561
New World Development Co. Ltd. 152,783 1,032,117
------------
2,802,472
------------
RECREATION & OTHER CONSUMER GOODS: 0.2%
SMH AG, br. 1,800 1,109,451
------------
TELECOMMUNICATIONS: 11.7%
British Telecommunications PLC 980,000 6,622,983
Cpt-Telefonica Del Peru SA, ADR B 27,200 513,400
Cpt-Telefonica del Peru SA, B 3,000,000 5,582,998
Hong Kong Telecommunications Ltd. 2,154,631 3,468,247
Koninklijke PTT Nederland 121,935 4,654,223
Nokia AB, A 233,300 13,541,544
STET (Sta Finanziaria Telefonica
Torino) SPA, di Risp 1,850,000 6,250,462
Telecom Italia Spa, di Risp 4,850,000 9,645,613
Teledanmark AS, B 123,750 6,829,470
Telefonica de Espana SA, ADR 140,000 9,695,000
Telefonica de Argentina SA, B, ADR 299,800 7,757,325
Telefonos de Mexico SA, L, ADR 164,100 5,415,300
------------
79,976,565
------------
TRANSPORTATION: 0.7%
Koninklijke Nedlloyd NV 24,800 680,869
Qantas Airways Ltd., ADR, 144A 231,900 3,797,363
------------
4,478,232
------------
UTILITIES ELECTRICAL & GAS: 10.6%
Australian Gas & Light Company 1,000,000 5,691,122
British Gas PLC 1,870,000 7,191,815
*CEZ 19,000 684,011
Compania Sevillana de Electricidad 323,029 3,670,077
Consolidated Electric Power Asia Ltd. 3,148,800 7,389,065
Consolidated Electric Power Asia Ltd.,
ADR, 144A 32,000 744,000
Electricas Reunidas de Zaragoza 41,250 1,652,224
Electricidad de Caracas 648,949 658,140
Endesa-Empresa Nacional de
Electricidad SA, ADR 60,000 4,200,000
Evn Energie-Versorgung
Niederoesterreich AG 48,600 7,314,344
Hongkong Electric Holdings Ltd. 1,431,000 4,754,890
Iberdrola SA 626,500 8,879,338
National Grid Holdings PLC 122,100 408,924
National Power PLC 516,000 4,322,541
</TABLE>
31
<PAGE> 33
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS(cont.)
UTILITIES: ELECTRICAL & GAS (cont.)
Shandong Huaneng Power 100,000 $ 975,000
Thames Water Group PLC 799,000 8,383,655
VEBA AG 98,000 5,637,309
------------
72,556,455
------------
TOTAL COMMON STOCKS (cost $469,784,600) 590,181,784
------------
PREFERRED STOCKS: 2.4%
Banco Ganadero SA, ADR C, pfd. 20,000 430,000
Cemig-Cia Energetica de Minas Gerais,
pfd. 10,123,000 344,870
Lojas Americanas SA, pfd. 172,333,000 2,272,122
News Corp. Ltd., ADR 221,100 3,896,888
Telebras-Telecomunicacoes Brasileiras
SA, pfd. 4,866,533 374,673
Telebras-Telecomunicacoes Brasileiras
SA, pfd., ADR 116,100 8,881,650
------------
TOTAL PREFERRED STOCKS 16,200,203
(cost $13,061,522) ------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
----------
<S> <C>
SHORT TERM OBLIGATIONS: 11.5%
Cost ($78,275,150)
U. S. Treasury Bills, 4.80% to 5.01%
with maturities to 3/27/97 U.S.78,806,000 $ 78,290,227
------------
TOTAL INVESTMENTS: 100.3%
(cost $561,121,272) 684,672,214
OTHER ASSETS, LESS LIABILITIES: (0.3%) (1,687,838)
------------
TOTAL NET ASSETS: 100.0% $682,984,376
============
</TABLE>
* NON-INCOME PRODUCING.
** PRINCIPAL AMOUNT IN CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE> 34
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
MARCH 4, 1996
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1996
-----------------
<S> <C>
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income .05
Net realized and unrealized loss (.62)
-------
Total from investment operations (.57)
-------
Net asset value, end of period $ 9.43
=======
TOTAL RETURN* (5.70)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $72,245
Ratio of expenses to average net assets 1.78%**
Ratio of expenses, net of reimbursement, to average net assets 1.70%**
Ratio of net investment income to average net assets 1.52%**
Portfolio turnover rate 9.95%
Average commission rate paid (per share) $ .002
</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.
** ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE> 35
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS: 83.3%
ARGENTINA 3.8%
*Astra Cia Argentina de Petroleo SA 42,382 $ 80,964
*Atanor Cia Nacional Para la Industria
Quimica SA, D 161,169 233,737
*Buenos Aires Embotelladora SA, ADR 29,000 108,750
Molinos Rio de Plata SA, B 48,000 170,911
Nobleza Piccardo Sdad Industrial
Comercial y Financial 12,909 49,063
Perez Companc SA, B 52,000 365,626
Quilmes Industrial SA 81,000 739,125
Siderar, A 16,595 47,802
*Sociedad Comercial del Plata
Cadelplata Come 26,000 66,572
YPF Sociedad Anonima, ADR 35,000 883,750
------------
2,746,300
------------
BOTSWANA: 0.7%
Metsef Ltd. 25,000 41,816
Sechaba Investment Trust Ltd. 406,000 272,747
Sefalana Holding Co. Ltd. 41,100 47,896
Standard Chartered Bank Botswana Ltd. 122,000 132,973
------------
495,432
------------
BRAZIL: 2.4%
Aracruz Celulose SA, ADR 2,700 22,275
*Banco do Brasil SA 17,830,000 154,432
*Banco do Brazil SA, pfd. 19,153,000 165,891
Companhia Siderurgica Nacional 220,000 6,246
Copene-Petroquimica do Nordeste SA, A,
pfd. 344,000 132,422
Duratex SA, pfd. 3,715,000 139,433
Itausa-Investimentos Itau SA, pfd. 1,305,000 979,598
Petrobras-Petroleo Brasileiro SA, pfd. 692,000 110,217
------------
1,710,514
------------
CHINA: 2.8%
China Southern Glass Co. Ltd., B 236,600 146,833
Chiwan Wharf Holdings Ltd., B 192,000 136,531
Guangzhou Shipyard International Co.
Ltd., H 787,000 199,434
Luoyang Glass Co. Ltd., H 482,000 148,006
Maanshan Iron & Steel Co. Ltd., H 209,000 44,856
Northeast Electric Transmission &
Transformation 804,000 140,332
*Phoenix Co. Ltd. 624,710 112,448
Shandong Huaneng Power 500 4,875
Shanghai Dazhong Taxi Shareholding Co.
Ltd., B 133,900 110,601
Shanghai New Asia Group Co. Ltd., B 50,000 21,800
Shanghai Pechemical Co. Ltd., H 1,548,000 470,334
*Shanghai Shangling Electric
Appliance, B 450,000 195,300
*Shanghai Steel Tube Co. Ltd., B 400,000 76,000
*Shanghai Tyre & Rubber Co. Ltd., B 336,000 142,464
*Shanghai Yaohua Pilkington Glass, B 142,000 $ 67,592
*Shenzhen China Bicycles Co.
(Holdings) Ltd., B 700 304
------------
2,017,710
------------
CZECH REPUBLIC: 2.2%
*CEZ 23,000 828,014
*CEZ, GDR 10,000 360,000
Chemopetrol Group AS 1,442 62,571
Komercni Banka AS 1,000 83,327
*SPT Telecom AS 2,000 249,026
------------
1,582,938
------------
GHANA: 0.8%
Ashanti Goldfields Co. Ltd., GDR 47,000 581,625
------------
GREECE: 1.7%
Delta Dairy SA 22,700 259,471
Ergo Bank SA 4,000 202,748
Hellas Can--Container Manufacturers 9,000 126,039
Hellenic Telecommunications
Organizations 16,700 285,317
Hellenic Telecommunications
Organizations, 144A 15,000 256,273
National Bank of Greece SA 1,000 63,637
Titan Cement Co., reg. 1,000 54,376
------------
1,247,861
------------
HONG KONG: 5.8%
*Citybus 2,200 583
Cross Harbour Tunnel Co. Ltd. 121,000 263,605
Dairy Farm International Holdings Ltd. 200,000 161,000
Hang Lung Development Co. Ltd. 126,000 276,941
Hongkong Electric Holdings Ltd. 237,000 787,498
Hopewell Holdings Ltd. 2,029,000 1,311,656
Hualing Holdings Ltd. 556,000 61,822
IMC Holdings Ltd. 32,000 16,963
Jardine Matheson Holdings Ltd. 10,000 66,000
Lai Sun Garment International Ltd. 66,000 104,958
Laws International Holdings Ltd. 686,000 107,319
NG Fund Hong Ltd. 266,000 239,020
Semi-Tech (Global) Co. Ltd. 57,069 94,445
Swire Pacific Ltd., B 310,000 468,938
Wheelock & Co. Ltd. 83,000 236,621
------------
4,197,369
------------
HUNGARY: 1.2%
Borsodchem, RT 2,089 52,322
Borsodchem, RT, GDR, 144A 4,000 100,600
Mol Magyar Olay--Es Gazipari, RT 3,242 40,500
Pick Szeged, RT 1,000 59,184
*Tiszai Vegyi Kombinat, RT 23,564 268,137
*Tiszai Vegyi Kombinat, RT, GDR, S 8,000 90,400
*Tiszai Vegyi Kombinat, RT, GDR, 144A 21,000 237,300
------------
848,443
------------
</TABLE>
34
<PAGE> 36
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
INDIA: 0.7%
Gujarat Narmanda Valley Fertilizers
Co. Ltd., ADR 9,000 $ 24,750
India Cements Ltd., GDR 139,700 349,250
Indian Rayon & Industries Ltd., GDR 12,000 102,600
*Indo Gulf Fertilisers & Chemicals,
GDR 7,150 5,184
------------
481,784
------------
INDONESIA: 4.6%
*Asia Pulp & Paper Co. Ltd., ADR 26,400 300,300
PT Bank Dagang Nasional Indonesia,
fgn. 125,000 127,011
PT Barito Pacific Timber, fgn. 219,000 134,441
PT Branta Mulia, fgn. 95,000 104,572
*PT Charoen Pokphand Indonesia, fgn. 296,000 327,392
PT Gadjah Tunggal, fgn. 545,500 236,722
PT Indah Kiat Pulp & Paper Corp., fgn. 104,000 75,953
PT Indocement Tunggal Prakarsa, fgn. 51,000 77,731
PT Jakarta International Hotel &
Development, fgn. 181,000 130,271
PT Kalbe Farma, fgn. 74,000 84,589
PT Pabrik Kertas Tjiwi Kimia, fgn. 297,590 296,078
PT Pudjiadi Prestige Ltd., fgn. 358,000 128,831
PT Semen Cibinong, fgn. 40,500 114,024
PT Sinar Mas Agro Resources &
Technology Corp., fgn. 206,500 146,438
PT Sumalindo Lestari Jaya, fgn. 146,000 108,171
PT Tambang Timah (Persero), fgn. 347,000 631,710
PT Ultra Jaya Milk, fgn. 143,000 66,596
PT United Tractors, fgn. 106,000 222,142
------------
3,312,972
------------
MALAYSIA: 2.9%
*Aokam Perdana Bhd. 20,000 23,678
Berjaya Singer Bhd., fgn. 81,000 121,877
Boustead Holdings Bhd., fgn. 39,000 87,250
Hong Leong Industries Bhd. 78,000 265,611
*Hong Leong Industries Bhd, new 46,800 158,440
*Hong Leong Industries Bhd, wts., fgn. 19,500 4,633
Island & Peninsula Bhd, fgn. 45,000 150,564
Leader Universal Holdings Bhd. 165,000 346,268
MBF Capital Bhd. 331,000 537,359
Renong Bhd. 232,000 411,546
------------
2,107,226
------------
MEXICO: 5.6%
Cemex SA, B 327,000 1,275,267
*Cifra SA, C 53,000 64,634
Coca Cola Femsa SA de CV, ADR 12,000 346,500
Cydea SA de CV 66,000 118,636
*DESC SA, C 24,000 130,945
Fomento Economico Mexicano SA de CV, B 106,000 363,567
*Grupo Financiero Banamex
Accival SA, L 276,000 543,445
*Grupo Financiero Bancomer SA de CV, B 500,000 200,076
------------
*Grupo Financiero Bancomer SA de CV, L 1,704,000 573,628
*Grupo Financiero Serfin SA, B 732,000 251,997
Vitro SA 115,000 208,905
------------
4,077,600
------------
PAKISTAN: 4.4%
*Bank of Punjab 208,500 83,754
*DG Khan Cement Co. 2,651,000 611,822
Engro Chemical 55,000 184,569
National Development Leasing Corp. 3,213,000 581,195
*Pakistan Electron Ltd. 563,000 165,051
*Pakistan International Airlines Corp. 1,900,600 414,927
*Pakistan Telecom Corp. PTC 73,000 45,716
*Pakistan Telecommunications Corp.,
PTC, A 263,000 164,704
*Pakland Cement Co. Ltd. 1,420,800 584,912
*Union Bank Ltd. 1,408,000 351,298
------------
3,187,948
------------
PERU: 0.2%
Cpt-Telefonica Del Peru SA, ADR B 7,000 132,125
------------
PHILIPPINES: 1.5%
*Keppel Philippine Holdings Inc., B 5,324,400 587,101
*Philex Mining Corp., B 1,245,000 142,015
*Philippine National Bank 18,750 222,790
RFM Corp. 889,000 152,110
------------
1,104,016
------------
POLAND: 2.4%
Bank Gdanski SA 4,955 64,456
*Bank Inicjatyw Gospodarczch SA, G 114,238 159,361
Bank Przemyslowo-Handlowy SA 1,000 64,518
*Farm Food S.A., rts. 518 2,385
Farm Food SA 2,592 41,763
Huta Olawa SA 49,959 216,046
Przedsiebiorstwo Cukiernicze
Jutrzenka SA 25,000 483,888
*Przedsiebiorstwo Handlu
Zagranicznego Universal SA 200,000 568,459
Rolimpex SA 965 7,505
Warta SA 3,000 48,650
Zaklady Cementowo Wapiennicze Gorazdze
Chorula 2,072 51,666
Zaklady Piwowarskie W Zywcu SA 1,000 46,383
------------
1,755,080
------------
PORTUGAL: 0.3%
Espirito Santo Financial Holding
SA, ADR 7,000 92,750
Portugal Telecom SA 3,000 85,521
------------
178,271
------------
RUSSIA: 4.0%
GUM Trade House 1,000 27,500
Irkutskenergo 2,058,000 271,656
*Kamaz 119,000 151,725
</TABLE>
35
<PAGE> 37
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
RUSSIA: (cont.)
*Krasnoyarsk Aluminum Plant 5,748 $ 67,252
*Lukoil Holdings., pfd. 26,000 213,980
Lukoil-Holdings 9,000 103,410
*Megionneftegaz 50,000 160,000
Mosenergo 478,000 487,560
*Murmansk Sea Shipping 3,000 66,000
*Norilsk Nickel 35,000 183,750
*Norilsk Nickel, pfd. 10,000 30,100
*Novolipetsk Mettallurgy 2,000 67,000
Primorsk Shipping 40,000 70,000
*Purneftegaz 40,000 104,000
*Red October 3,000 63,000
Rostelekom 153,000 365,670
*Rostelekom, pfd. 43,000 82,775
*Saint Petersburg City Telephone Net,
pfd. 7,000 6,475
*Tsum Trade House 216,000 84,348
*Tyumen Telecom 2,000 2,100
*Unified Energy System 3,000,000 274,500
*Uralmash 1,200 4,080
------------
2,886,881
------------
SINGAPORE: 5.3%
Acer Computer International Ltd. 71,000 122,120
*Acer Computer International Ltd.,
wts. 6,400 3,008
First Capital Corp. Ltd. 40,000 120,632
First Capital Corp. Ltd., fgn. 181,000 545,859
Hai Sun Hup Group Ltd. 220,000 161,938
Hour Glass Ltd. 693,000 505,153
Inchcape Bhd., fgn. 59,000 204,917
Isetan Ltd., fgn. 69,000 149,164
Jurong Shipyard, fgn 108,000 544,129
Natsteel Ltd. 78,000 177,260
Natsteel Ltd., fgn. 86,000 195,441
*Osprey Maritime Ltd. 120,000 182,663
Sembawang Corp. Ltd. 158,000 835,561
WBL Corp. Ltd. 36,000 84,385
------------
3,832,230
------------
SLOVAK REPUBLIC: 0.8%
Nafta Gbely AS 7,195 359,048
Slovnaft AS 6,000 146,056
*Vychodoslovenske Zeleziarne AS 1,900 33,206
------------
538,310
------------
SOUTH AFRICA: 6.3%
Anglo American Industrial Corp. Ltd. 21,020 761,545
Anglovaal Industried Ltd. 48,000 216,993
*Anglovaal Industries Ltd., rts. 2,640 203
BTR Dunlop Ltd. 91,700 99,472
CG Smith Ltd. 15,000 73,261
Del Monte Royal Foods Ltd 513,700 516,061
Engen Ltd. 14,000 74,810
First National Bank Holdings Ltd. 16,000 78,316
*Irvin & Johnson Ltd. 135,900 119,096
Kersaf Investments Ltd. 27,900 255,683
Malbak Ltd. 12,100 53,019
*McCarthy Retail Ltd. 259,500 $ 665,598
McCarthy Retail, zero, conv., 9/30/03 24,000 56,428
Palabora Mining Co. Ltd. 8,500 138,987
*Rainbow Chicken Ltd. 702,000 132,042
Reunert Ltd. 20,000 66,260
Sappi Ltd. 38,000 341,135
South African Breweries Ltd. 9,800 248,221
South African Iron & Steel Industrial
Corp. Ltd. 479,058 342,001
Sun International Ltd. 380,300 304,825
------------
4,543,956
------------
SOUTH KOREA: 3.8%
Boram Bank Co. Ltd. 10,000 82,840
BYC Co. Ltd. 260 27,692
*Cho Hung Bank, GDR 144A 90,000 675,000
Daegu Bank Co. Ltd. 12,000 143,289
Dongkuk Steel Mill Co. Ltd. 4,000 79,053
Hae In Corp. Ltd. 15,000 671,006
*Hana Bank, GDR 21,773 329,425
Korea First Bank 58,110 294,332
Korea Kumho Petrochemical 2,000 16,568
Kukdong Oil & Chemical Co. Ltd. 18,640 436,772
------------
2,755,977
------------
TAIWAN: 0.1%
*United Microelectronics Corp. 62,000 87,927
------------
THAILAND: 9.8%
Ayudhya Insurance Public Co. Ltd. 3,900 30,110
Bangkok Bank Public Co. Ltd. 104,000 774,546
Bangkok Insurance, fgn. 4,900 69,547
Bangkok Land Public Co. Ltd., fgn. 16,000 17,781
Charoen Pokphand Feedmill Public Co.
Ltd. 40,000 124,776
*Land and House Public Co. Ltd. 37,000 251,033
Regional Container Lines Public Co.
Ltd., fgn. 34,400 332,652
Saha Pathanapibul Public Co Ltd., fgn. 347,700 813,460
Saha Pathanapibul Public Co. Ltd. 52,800 123,528
Saha Union Public Co. Ltd. 366,300 314,224
Sanyo Universal Electric Public Co
Ltd., fgn. 25,400 80,223
Sanyo Universal Electric Public Co.
Ltd. 69,200 218,560
Siam Cement Co. Ltd.(The), fgn. 31,400 984,387
Siam City Bank Public Co. Ltd., fgn. 745,000 697,185
*Siam Commercial Bank Ltd., loc. 36,000 235,826
Sino-Thai Engineering & Construction
Public Co. 350,200 914,895
Sino-Thai Engineering & Construction
Public Co., fgn. 76,100 198,811
Thai Farmers Bank Public Co. Ltd. 131,000 638,501
Thai Rayon Public Co. Ltd., fgn. 100 546
Thai Wah Public Co. Ltd. 486,000 293,730
------------
7,114,321
------------
</TABLE>
36
<PAGE> 38
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
TURKEY: 8.9%
Akbank 856,000 116,422
*Alcatel Teletas Endustri Tic AS 1,176,000 83,497
Bagfas 70,000 $ 15,814
Borusan AS 25,976,000 1,628,740
Cimentas Izmir Cimento Fabrikasi Turk
AS 431,000 45,703
Cimsa Cimento Sanayi ve Ticaret AS 225,000 20,747
Erciyas Biracilik 105,000 11,376
Eregli Demir ve Celik Fabrikalari AS 4,148,000 497,224
Izocam Ticaret ve Sanayii AS, br. 16,816,000 1,116,415
Netas Northern Electric Telekomunic
Asyon AS 364,000 82,231
Otosan Otomobil Sanayii AS 266,000 107,921
Petkim Petrokimya Holding AS 677,000 271,549
*Sasa Sun'i Sente 1,000,000 67,312
Tat Konserve Sanayii AS 481,999 72,222
*Tofas Turk Otomobil Fabrikasi AS 5,429,000 212,755
Turk Demir Dokum, br. 22,449,000 2,028,586
Turkiye Garanti Bankasi AS 1,705,000 77,036
------------
6,455,550
------------
ZIMBABWE: 0.3%
Delta Corp. 14,000 49,057
Ta Holdings 464,000 74,877
Zimbabwe Sun Ltd. 200,000 74,692
------------
198,626
------------
TOTAL LONG TERM INVESTMENTS
(cost $61,572,552) 60,178,992
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
----------
<S> <C>
SHORT TERM OBLIGATIONS: 13.4%
Federal Farm Credit Banks, 5.21% to
5.28%, with maturities to
2/03/97 U.S. $2,675,000 2,669,156
Federal Home Loan Banks, 5.21% to
5.27%, with maturities to
1/16/97 U.S. 2,610,000 2,607,361
Federal Home Loan Mortgage Corp. U.S.,
5.22% to 5.27%, with maturities to
1/31/97 1,711,000 $ 1,707,473
Federal National Mortgage Assoc. U.S.,
5.22% to 5.24%, with maturities to
2/10/97 2,710,000 2,701,161
------------
TOTAL SHORT TERM OBLIGATIONS
($9,683,100) 9,685,151
------------
<CAPTION>
MATURITY
VALUE
-----------
<S> <C>
REPURCHASE AGREEMENTS: 3.0%
Aubrey G. Lanston & Co., 6.75%
Collateralized by $1,124,000
U.S. Treasury Note, 12/31/98,
Value $1,122,595 U.S. 1,100,413 1,100,000
UBS Securities Inc., 6.75%
Collateralized by $1,065,000
U.S. Treasury Note, 11/15/97,
Value $1,104,938 U.S. 1,083,406 1,083,000
------------
TOTAL REPURCHASE AGREEMENTS (cost
$2,183,000) 2,183,000
------------
TOTAL INVESTMENTS: 99.7% (cost
$73,438,652) 72,047,143
OTHER ASSETS, LESS LIABILITIES: 0.3% 198,023
------------
TOTAL NET ASSETS: 100.0% $ 72,245,166
============
</TABLE>
* NON-INCOME PRODUCING.
** PRINCIPAL AMOUNT IN CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE> 39
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 18.72 $ 15.69 $ 16.55 $ 13.49 $ 12.85
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income .63 .57 .44 .42 .39
Net realized and unrealized gain (loss) 2.76 2.87 (.92) 3.03 .66
-------- -------- -------- -------- -------
Total from investment operations 3.39 3.44 (.48) 3.45 1.05
-------- -------- -------- -------- -------
Distributions:
Dividends from net investment income (.58) (.41) (.31) (.35) (.41)
Distributions from net realized gains (.45) -- (.07) (.04) --
-------- -------- -------- -------- -------
Total distributions (1.03) (.41) (.38) (.39) (.41)
-------- -------- -------- -------- -------
Change in net asset value 2.36 3.03 (.86) 3.06 .64
-------- -------- -------- -------- -------
Net asset value, end of year $ 21.08 $ 18.72 $ 15.69 $ 16.55 $ 13.49
======== ======== ======== ======== =======
TOTAL RETURN* 18.93% 22.48% (2.96)% 26.12% 8.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $556,027 $406,123 $288,172 $183,360 $79,242
Ratio of expenses to average net assets .64% .66% .75% .77% .80%
Ratio of net investment income to average net assets 3.56% 3.73% 4.02% 4.16% 4.47%
Portfolio turnover rate 57.50% 43.02% 51.36% 81.50% 120.53%
Average commission rate paid (per share) $ .0008
</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.
38
<PAGE> 40
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------------ ------------
<S> <C> <C>
COMMON STOCKS: 63.6%
APPLIANCES & HOUSEHOLD DURABLES: 0.5%
Sony Corp. 42,000 $ 2,752,612
------------
AUTOMOBILES: 3.1%
Fiat Spa 2,147,000 6,473,573
Ford Motor Co. 84,000 2,677,500
General Motors Corp. 40,000 2,230,000
Volvo AB, B 260,000 5,737,663
------------
17,118,736
------------
BANKING: 9.5%
Bangkok Bank Public Co. Ltd., fgn. 157,800 1,525,946
BankAmerica Corp. 32,000 3,192,000
Bankinter SA 39,625 6,144,050
Banque Nationale de Paris 130,000 5,034,523
Banque Nationale de Paris, ADR, 144A 5,400 209,126
Barclays PLC 34,100 584,456
Canadian Imperial Bank of Commerce 70,000 3,089,701
Citicorp 30,000 3,090,000
CS Holding, br. 15,250 1,566,586
Den Norske Bank 2,178,900 8,369,873
HSBC Holdings PLC 282,200 6,038,412
Komercni Banka AS, GDR, 144A 45,000 1,233,900
*Merita Ltd., A 2,250,000 6,994,565
NationsBank Corp. 15,000 1,466,250
Sparbanken Sverige AB, A, 144A 113,800 1,952,330
Westpac Banking Corp. 449,074 2,555,735
------------
53,047,453
------------
BROADCASTING & PUBLISHING: 0.6%
News Corp. Ltd., ADR 160,000 3,340,000
------------
BUSINESS & PUBLIC SERVICES: 0.6%
WMX Technologies Inc. 100,000 3,262,500
------------
CHEMICALS: 3.3%
Akzo Nobel NV 48,700 6,656,936
DSM NV 25,000 2,467,420
Rhone-Poulenc SA, A 201,800 6,884,941
Solvay SA 4,000 2,448,980
------------
18,458,277
------------
DATA PROCESSING & REPRODUCTION: 2.9%
*Bay Networks Inc 150,000 3,131,250
*Microsoft Corp. 50,000 4,131,250
*Newbridge Networks Corp. 180,000 5,085,000
*Optical Data Systems Inc. 300,000 3,600,000
------------
15,947,500
------------
ELECTRICAL & ELECTRONICS: 3.9%
Alcatel Alsthom SA 92,119 7,405,053
*DSC Communications Corp. 227,900 4,073,713
Hitachi Ltd. 80,000 746,050
Motorola Inc. 94,000 5,769,250
Philips Electronics NV 90,000 3,649,001
------------
21,643,067
------------
ELECTRONIC COMPONENTS & INSTRUMENTS: 1.3%
BICC 570,000 $ 2,704,800
Intel Corp. 36,000 4,713,750
------------
7,418,550
------------
ENERGY SOURCES: 0.6%
Total SA, B 39,000 3,174,156
------------
FINANCIAL SERVICES: 2.8%
American Express Co. 129,000 7,288,500
Dean Witter Discover & Co. 74,683 4,947,749
Federal National Mortgage Assn. 80,000 2,980,000
Peregrine Investments Holdings Ltd. 350,000 599,586
*Peregrine Investments Holdings
Ltd., wts. 35,000 11,200
------------
15,827,035
------------
FOOD & HOUSEHOLD PRODUCTS: 0.7%
Burns Philp & Co. Ltd. 1,603,300 2,854,616
Unilever NV 3,400 601,819
Unilever PLC 12,300 298,471
------------
3,754,906
------------
FOREST PRODUCTS & PAPER: 1.8%
Assidomaen AB 90,000 2,507,387
Carter Holt Harvey Ltd. 293,020 664,952
*Enso OY, R 225,000 1,824,457
International Paper Co. 50,000 2,018,750
Stora Kopparbergs Bergslags AB, B 225,000 3,068,249
------------
10,083,795
------------
HEALTH & PERSONAL CARE: 0.8%
Aetna Inc. 16,700 1,336,000
Medeva PLC 272,675 1,193,484
Smithkline Beecham PLC, A 25,000 1,710,000
------------
4,239,484
------------
INDUSTRIAL COMPONENTS: 1.8%
Goodyear Tire & Rubber Co. 60,000 3,082,500
Madeco Manufacturera de Cobre SA,
ADR 162,500 3,940,625
SKF AB, B 117,500 2,782,503
------------
9,805,628
------------
INSURANCE: 2.9%
Allstate Corp. 40,000 2,315,000
ING Groep NV 125,000 4,503,330
Skandia Foersaekrings AB, free 245,000 6,933,437
Torchmark Corp. 45,000 2,272,500
------------
16,024,267
------------
MACHINERY & ENGINEERING: 0.7%
*Gradall Industries Inc. 314,000 3,885,750
------------
MERCHANDISING: 2.3%
Dairy Farm International Holdings
Ltd. 1,000,000 805,000
*Federated Department Stores Inc. 200,000 6,825,000
</TABLE>
39
<PAGE> 41
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------------ ------------
<S> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING: (cont.)
Home Depot Inc. 65,000 $ 3,258,125
Sears Roebuck & Co. 42,000 1,937,250
------------
12,825,375
------------
METALS & MINING: 0.3%
Companhia Siderurgica Nacional 16,100,000 457,078
Reynolds Metals Co. 22,000 1,240,250
------------
1,697,328
------------
MULTI-INDUSTRY: 2.8%
Alfa SA de CV, A 1,048,500 4,841,587
Cheung Kong Holdings Ltd. 600,000 5,333,247
Hutchison Whampoa Ltd. 444,000 3,487,362
Jardine Matheson Holdings Ltd. 220,800 1,457,280
Jardine Strategic Holdings Ltd. 168,750 610,875
------------
15,730,351
------------
REAL ESTATE: 0.4%
New World Development Co. Ltd. 303,543 2,050,568
------------
TELECOMMUNICATIONS: 10.1%
A T & T Corp. 121,000 5,263,500
Cpt-Telefonica Del Peru SA, ADR B 124,000 2,340,500
Lucent Technologies Inc. 102,214 4,727,398
MCI Communications Corp. 196,000 6,406,750
Nokia AB, A 122,000 7,081,304
*SPT Telecom AS 31,950 3,978,183
STET (Sta Finanziaria Telefonica
Torino) SPA 477,000 2,168,840
STET (Sta Finanziaria Telefonica
Torino) SPA, di Risp 1,200,000 4,054,354
Telefonica de Argentina SA, B, ADR 315,000 8,150,625
Telefonica de Espana SA 260,000 6,038,128
Telefonos de Mexico SA, L, ADR 180,900 5,969,700
------------
56,179,282
------------
TEXTILES & APPAREL: 1.5%
*Fruit of the Loom Inc., A 160,000 6,060,000
Nike Inc., B 40,000 2,390,000
------------
8,450,000
------------
TRANSPORTATION: 4.6%
*Fritz Cos. 350,000 4,462,500
Koninklijke Nedlloyd NV 50,000 1,372,719
Kvaerner Industrier AS, B 215,000 9,337,567
Qantas Airways Ltd., ADR, 144A 376,000 6,157,000
Stena Line AB, B free 125,100 559,477
Unitor AS 286,000 3,677,015
------------
25,566,278
------------
UTILITIES ELECTRICAL & GAS: 3.8%
British Gas PLC 3,200,000 12,306,849
*CEZ 7,580 272,884
Endesa-Empresa Nacional de
Electricidad SA 30,500 2,170,768
Endesa-Empresa Nacional de
Electricidad SA, ADR 22,000 1,540,000
Iberdrola SA 85,000 $ 1,204,699
*Kohinoor Energy Ltd. 1,467,000 603,931
Pinnacle West Capital Corp. 40,000 1,270,000
VEBA AG 35,000 2,013,325
------------
21,382,456
------------
TOTAL COMMON STOCKS (cost $267,285,459) 353,665,354
------------
PREFERRED STOCKS: 3.5%
Banco Bradesco SA, pfd. 767,000,000 5,558,185
Cemig-Cia Energetica de Minas
Gerais, pfd. 12,676,000 431,845
News Corp. Ltd., pfd. 730,295 3,250,657
News Corp. Ltd., ADR, pfd. 80,000 1,410,000
Santander Finance Ltd., B, pfd. 91,500 2,264,625
Telbras-Telecomunicacoes Brasileiras
SA, pfd. 40,981,336 3,155,141
Telebras-Telecomunicacoes
Brasileiras SA, pfd., ADR 45,600 3,488,400
------------
TOTAL PREFERRED STOCKS (cost $13,762,611) 19,558,853
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
-------------
<S> <C> <C>
BONDS: 24.9%
Buoni Poliennali del Tes:
10.50%, 11/01/00 Itl. 7,210,000,000 5,683,344
10.50%, 9/01/05 Itl. 2,505,000,000 1,864,539
Essar Gujarat Ltd.,
8.537%, FRN, 7/15/99, 144A U.S. 2,765,000 2,695,875
Federal Republic of Germany,
Unity, 8.75%, 8/20/01 Ger. 2,335,000 1,766,161
Government of Australia,
10.00%, 10/15/02 Aus. 10,445,000 9,421,172
Government of Canada,
10.25%, 02/01/04 Can. 6,992,000 6,313,247
Government of Denmark,
8.00%, 5/15/03 Den. 8,392,000 1,578,505
Government of Italy,
10.50%, 7/15/00 Itl. 8,000,000,000 5,912,401
Government of New Zealand,
10.00%, 3/15/02 N.Z. 6,720,000 5,337,833
Government of Spain:
12.25%, 3/25/00 Sp. 386,710,000 3,530,953
11.30%, 1/15/02 Sp. 284,220,000 2,646,152
10.15%, 1/31/06 Sp. 187,420,000 1,711,286
Government of Sweden,
6.00%, 2/09/05 Swe. 8,800,000 1,250,479
Kingdom of Denmark:
9.00%, 11/15/00 Den. 12,575,000 2,433,217
8.00%, 11/15/01 Den. 14,247,000 2,685,374
Kingdom of Sweden:
13.00%, 6/15/01 Swe. 7,000,000 1,315,554
10.25%, 5/05/03 Swe. 9,700,000 1,735,441
Korea Development Bank,
9.48%, 4/02/01 U.S. 500,000 550,466
Pohang Iron & Steel,
6.625%, 7/01/03 U.S. 1,000,000 984,534
</TABLE>
40
<PAGE> 42
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY** VALUE
------------- ------------
<S> <C> <C>
BONDS (CONT.)
Republic of Argentina:
10.95%, 11/01/99 U.S. 1,025,000 $ 1,086,500
8.375%, 12/20/03 U.S. 1,280,000 1,203,200
L, 5.25%, VRN, 3/31/23 U.S. 2,560,000 1,632,000
Republic of Ireland,
6.25%, 10/18/04 Irl. 700,000 1,170,975
Treuhandanstalt,
7.125%, 1/29/03 Ger. 2,390,000 1,705,234
U.S. Treasury Bond,
6.375%, 8/15/02 U.S. 10,915,000 10,990,052
U.S. Treasury Note:
6.125%, 7/31/00 U.S. 24,305,000 24,312,607
6.25%, 8/31/00 U.S. 21,850,000 21,938,777
United Kingdom:
10.50%, 5/19/99 U.K. 1,825,000 3,360,871
8.00%, 12/07/00 U.K. 1,560,000 2,745,914
10.00%, 9/08/03 U.K. 2,675,000 5,198,296
United Mexican States,
9.75%, 2/6/01 U.S. 3,510,000 3,632,850
------------
TOTAL BONDS (cost $134,863,255) 138,393,809
------------
SHORT TERM OBLIGATIONS: 7.3%
Federal Farm Credit Banks,
5.24% to 5.30% with
maturities to 2/03/97 U.S. 3,700,000 3,690,749
Federal Home Loan Banks,
5.21% to 5.45% with
maturities to 1/10/97 U.S. 12,255,000 12,247,142
Federal Home Loan Mortgage Corp.,
5.21% to 5.42% with
maturities to 1/22/97 U.S. 5,370,000 $ 5,355,567
Federal National Mortgage Assn.,
5.30% to 5.35% with
maturities to 1/28/97 U.S. 17,842,000 17,766,125
Generale Bank,
6.50%, 1/02/97 U.S. 813,000 813,000
U. S. Treasury Bill,
4.94%, 4/17/97 U.S. 718,000 707,550
------------
TOTAL SHORT TERM OBLIGATIONS
(cost $40,576,001) 40,580,133
------------
TOTAL INVESTMENTS: 99.3%
(cost $456,487,326) 552,198,149
UNREALIZED GAIN IN FORWARD
EXCHANGE CONTRACTS: 0.1%
(Note 5) 332,935
OTHER ASSETS, LESS
LIABILITIES: 0.6% 3,496,080
------------
TOTAL NET ASSETS: 100.0% $556,027,164
============
</TABLE>
* NON-INCOME PRODUCING.
** PRINCIPAL AMOUNT IN CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE> 43
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.88 $ 10.86 $ 12.15 $ 10.91 $ 10.99
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .85 .80 .71 .60 .58
Net realized and unrealized gain (loss) .14 .76 (1.28) .65 .03
-------- -------- -------- -------- --------
Total from investment operations .99 1.56 (.57) 1.25 .61
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income (1.24) (.54) (.55) (.005) (.57)
Distributions from net realized gains -- -- (.17) (.005) (.12)
-------- -------- -------- -------- --------
Total distributions (1.24) (.54) (.72) (.01) (.69)
-------- -------- -------- -------- --------
Change in net asset value (.25) 1.02 (1.29) 1.24 (.08)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.63 $ 11.88 $ 10.86 $ 12.15 $ 10.91
======== ======== ======== ======== ========
TOTAL RETURN* 9.45% 14.92% (4.88)% 11.46% 5.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $ 34,046 $ 32,910 $ 29,343 $ 29,347 $ 15,674
Ratio of expenses to average net assets .68% .78% .90% .83% 1.00%
Ratio of net investment income to average net assets 7.35% 7.14% 6.80% 6.50% 6.93%
Portfolio turnover rate 141.19% 188.11% 203.91% 170.33% 147.77%
</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.
42
<PAGE> 44
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT* VALUE
------------- -----------
<S> <C> <C>
BONDS--CORPORATE: 11.4%
Abril SA, 12.00%, 10/25/03, 144A U.S. 475,000 $ 496,375
Essar Gujarat Ltd., 8.099%, FRN,
7/15/99, 144A U.S. 284,000 276,900
Ford Motor Credit Corp.,
8.21%, 3/16/99 U.S. 1,300,000 1,351,632
General Motors Corp.,
7.625%, 2/15/97 U.S. 375,000 375,771
Softe SA,
8.75%, 3/24/97 Itl. 1,000,000,000 660,455
Statkraft SF,
7.50% 11/10/99 Ger. 1,000,000 704,582
-----------
TOTAL BONDS--CORPORATE
(cost $3,894,662) 3,865,715
-----------
BONDS--GOVERNMENT & GOVERNMENT
AGENCIES: 82.5%
Buoni Poliennali del Tes,
10.50%, 9/01/05 Itl. 2,560,000,000 2,017,942
Government of Australia,
10.00%, 10/15/02 Aus. 2,610,000 2,354,166
Government of Canada,
10.25%, 2/01/04 Can. 1,426,000 1,287,570
Government of Denmark,
8.00%, 5/15/03 Den. 3,306,000 621,847
Government of Italy,
10.50%, 7/15/00 Itl. 330,000,000 243,886
Government of New Zealand,
10.00%, 3/15/02 N.Z. 1,790,000 1,421,833
Government of Spain:
12.25%, 3/25/00 Sp. 105,670,000 964,847
11.30%, 1/15/02 Sp. 61,200,000 569,786
Government of Sweden,
6.00%, 2/09/05 Swe. 2,300,000 326,830
Kingdom of Denmark,
8.00%, 11/15/01 Den. 3,429,000 646,322
Kingdom of Sweden,
10.25%, 5/05/03 Swe. 4,000,000 715,646
NHA, Bank Nova Scotia,
6.375%, 11/01/97 Can. 291,980 217,550
Republic of Argentina:
10.95%, 11/01/99 U.S. 350,000 371,000
8.375%, 12/20/03 U.S. 440,000 413,600
5.25%, L, VRN, 3/31/23 U.S. 655,000 417,562
Republic of Ireland:
6.50%, 10/18/01 Irl. 565,000 $ 972,900
6.25%, 10/18/04 Irl. 220,000 368,021
Republic of Germany,
8.00%, 7/22/02 Ger. 1,250,000 928,827
Sweden Kingdom,
13.00%, 6/15/01 Swe. 1,800,000 338,285
U.S. Treasury Bond,
6.375%, 8/15/02 U.S. 4,090,000 4,118,123
U.S. Treasury Notes:
6.125%, 7/31/00 U.S. 2,570,000 2,570,804
6.25%, 8/31/00 U.S. 2,100,000 2,108,532
United Kingdom:
10.50%, 5/19/99 U.K. 380,000 699,798
8.00%, 12/07/00 U.K. 430,000 756,886
10.00%, 9/08/03 U.K. 780,000 1,515,765
United Mexican States,
9.75%, 2/06/01 U.S. 1,080,000 1,117,800
-----------
TOTAL BONDS--GOVERNMENT &
GOVERNMENT AGENCIES
(cost $27,120,096) 28,086,128
-----------
SHORT TERM OBLIGATIONS: 3.2%
Federal Home Banks,
5.45, 1/09/97 U.S. 960,000 958,970
U.S. Treasury Bills,
4.92% to 4.94%, with
maturities to 4/17/97 U.S. 150,000 147,890
-----------
TOTAL SHORT TERM OBLIGATIONS
(cost $1,106,576) 1,106,860
-----------
TOTAL INVESTMENTS: 97.1%
(cost $32,121,334) 33,058,703
UNREALIZED GAIN IN FORWARD EXCHANGE
CONTRACTS: 0.3% 108,433
OTHER ASSETS, LESS LIABILITIES: 2.6% 878,745
-----------
TOTAL NET ASSETS: 100.0% $34,045,881
===========
</TABLE>
* PRINCIPAL AMOUNT IN CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE> 45
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON MONEY MARKET FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $1.00 $1.00 $ 1.00
------- ------- ------- ------- -------
Net investment income .05 .05 .03 .02 .03
Dividends from net investment income (.05) (.05) (.03) (.02) (.03)
------- ------- ------- ------- -------
Change in net asset value -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year $ 1.00 $ 1.00 $1.00 $1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN* 4.99% 5.35% 3.48% 2.41% 3.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $14,086 $20,723 $33,090 $16,992 $21,454
Ratio of expenses to average net assets .55% .63% .71% .75% .69%
Ratio of net investment income to average net assets 4.86% 5.29% 3.56% 2.38% 3.02%
</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.
44
<PAGE> 46
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON MONEY MARKET FUND
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ -----------
<S> <C> <C>
GOVERNMENT & GOVERNMENT:
AGENCIES: 95.8%
Federal Farm Credit Bank:
5.16%, 1/08/97 U.S. $600,000 $ 599,342
5.30%, 3/20/97 U.S. 800,000 790,813
5.33%, 2/18/97 U.S. 800,000 794,315
5.40%, 1/10/97 U.S. 600,000 599,280
5.50%, 1/22/97 U.S. 650,000 647,915
Federal Home Loan Bank:
5.20%, 1/23/97 U.S. 750,000 747,616
5.23%, 1/09/97 U.S. 800,000 799,070
5.34%, 1/02/97 U.S. 750,000 749,878
Federal Home Loan Mortgage Corp.:
5.22%, 1/07/97 U.S. 700,000 699,391
5.23%, 1/06/97 U.S. 564,000 563,591
5.26%, 2/24/97 U.S. 750,000 744,192
5.27%, 1/14/97 U.S. 650,000 648,763
5.40%, 1/17/97 U.S. 800,000 798,080
Federal National Mortgage Assn.:
5.22%, 1/17/97 U.S. 700,000 698,376
5.23%, 1/17/97 U.S. 700,000 698,372
5.31%, 2/18/97 U.S. 750,000 744,690
5.32%, 2/27/97 U.S. 700,000 694,104
5.35%, 1/28/97 U.S. 750,000 746,991
5.38%, 1/28/97 U.S. 735,000 732,034
-----------
TOTAL GOVERNMENT & GOVERNMENT
AGENCIES 13,496,813
-----------
</TABLE>
<TABLE>
<CAPTION>
MATURITY
VALUE
------------
<S> <C>
REPURCHASE AGREEMENT: 1.7%
Aubrey G. Lanston & Co., 1/02/97
Collateralized by $229,000
U.S. Treasury Note, 8.875%,
11/15/97, Value $237,588 U.S. 232,087 $ 232,000
-----------
TOTAL INVESTMENTS: 97.5%
(cost $13,728,813) 13,728,813
OTHER ASSETS, LESS LIABILITIES: 2.5% 357,048
-----------
TOTAL NET ASSETS: 100.0% $14,085,861
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE> 47
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
divided by 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.
46
<PAGE> 48
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$561,121,272) $684,672,214
Cash 71,417
Receivables:
Investment securities sold 168,219
Fund shares sold 607,547
Dividends and interest 1,956,779
------------
Total assets 687,476,176
------------
Liabilities:
Payables:
Investment securities purchased 3,582,106
Fund shares redeemed 449,808
Accrued expenses 459,886
------------
Total liabilities 4,491,800
------------
Net assets, at value $682,984,376
============
Net assets consist of:
Undistributed net investment income $ 16,391,933
Net unrealized appreciation 123,550,942
Accumulated net realized gain 7,500,283
Net capital paid in on shares of beneficial interest 535,541,218
------------
Net assets, at value $682,984,376
============
Shares outstanding 37,112,231
============
Net asset value per share ($682,984,376
divided by 37,112,231) $ 18.40
============
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income: (net of $2,168,920 foreign
taxes withheld)
Dividends $17,228,240
Interest 2,966,305
-----------
Total income $ 20,194,545
Expenses:
Management fees (Note 3) 2,445,202
Administrative fees (Note 3) 576,341
Custodian fees 211,500
Reports to shareholders 59,700
Audit fees 26,000
Legal fees 9,000
Registration and filing fees 2,500
Trustees' fees and expenses 25,000
Other 14,590
-----------
Total expenses 3,369,833
------------
Net investment income 16,824,712
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 7,826,531
Foreign currency transactions (228,808)
-----------
7,597,723
Net unrealized appreciation on investments 91,776,417
-----------
Net realized and unrealized gain 99,374,140
------------
Net increase in net assets resulting from
operations $116,198,852
============
</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 $ 16,824,712 $ 5,890,627
Net realized gain on investment and foreign currency transactions 7,597,723 1,822,295
Net unrealized appreciation 91,776,417 30,394,794
------------ ------------
Net increase in net assets resulting from operations 116,198,852 38,107,716
Distributions to shareholders:
From net investment income (6,297,332) (1,444,552)
From net realized gain (1,836,722) (619,093)
Fund share transactions (Note 2) 221,778,404 167,006,724
------------ ------------
Net increase in net assets 329,843,202 203,050,795
Net assets:
Beginning of year 353,141,174 150,090,379
------------ ------------
End of year $682,984,376 $353,141,174
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE> 49
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$73,438,652) $72,047,143
Cash 491,407
Receivables:
Fund shares sold 375,350
Dividends and interest 122,597
-----------
Total assets 73,036,497
-----------
Liabilities:
Payables for investment securities purchased 591,931
Accrued expenses 199,400
-----------
Total liabilities 791,331
-----------
Net assets, at value $72,245,166
===========
Net assets consist of:
Undistributed net investment income $ 381,731
Net unrealized depreciation (1,391,509)
Accumulated net realized gain 240,154
Net capital paid in on shares of beneficial interest 73,014,790
-----------
Net assets, at value $72,245,166
===========
Shares outstanding 7,660,863
===========
Net asset value per share ($72,245,166
divided by 7,660,863) $ 9.43
===========
</TABLE>
STATEMENT OF OPERATIONS
for the period March 4, 1996 (commencement of
operations) to December 31, 1996
<TABLE>
<S> <C> <C>
Investment income: (net of $48,524 foreign taxes
withheld)
Dividends $ 460,470
Interest 347,395
-----------
Total income $ 807,865
Expenses:
Management fees (Note 3) 313,283
Administrative fees (Note 3) 27,760
Custodian fees 69,500
Reports to shareholders 8,000
Audit fees 14,000
Legal fees 1,000
Registration and filing fees 5,900
Trustees' fees and expenses 1,250
Other 4,806
-----------
Total expenses 445,499
Less expenses reimbursed (Note 3) (19,365)
-----------
Total expenses less reimbursement 426,134
-----------
Net investment income 381,731
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 309,849
Foreign currency transactions (69,695)
-----------
240,154
Net unrealized depreciation on investments (1,391,509)
-----------
Net realized and unrealized loss (1,151,355)
-----------
Net decrease in net assets resulting from
operations $ (769,624)
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the period March 4, 1996 (commencement of
operations) to December 31, 1996
<TABLE>
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 381,731
Net realized gain on investment and foreign currency transactions 240,154
Net unrealized depreciation (1,391,509)
-----------
Net decrease in net assets resulting from operations (769,624)
Fund share transactions (note 2) 73,014,790
-----------
Net increase in net assets 72,245,166
Net assets:
Beginning of period --
-----------
End of period $ 72,245,166
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE> 50
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$456,487,326) $552,198,149
Cash 249,787
Receivables:
Investment securities sold 119,790
Fund shares sold 280,927
Dividends and interest 4,774,416
Unrealized gains on forward exchange contracts (Note 5) 430,316
------------
Total assets 558,053,385
------------
Liabilities:
Payables:
Investment securities purchased 1,510,881
Fund shares redeemed 23,292
Unrealized loss on forward exchange contracts (Note 5) 97,381
Accrued expenses 394,667
------------
Total liabilities 2,026,221
------------
Net assets, at value $556,027,164
============
Net assets consist of:
Undistributed net investment income $ 16,968,534
Net unrealized appreciation 96,044,067
Accumulated net realized gain 31,490,512
Net capital paid in on shares of beneficial interest 411,524,051
------------
Net assets, at value $556,027,164
============
Shares outstanding 26,377,866
============
Net asset value per share ($556,027,164
divided by 26,377,866) $ 21.08
============
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income: (net of $944,676 foreign
taxes withheld)
Dividends $ 8,591,746
Interest 11,439,699
-----------
Total income $20,031,445
Expenses:
Management fees (Note 3) 2,245,898
Administrative fees (Note 3) 526,854
Custodian fees 142,800
Reports to shareholders 39,100
Audit fees 34,500
Legal fees 7,700
Registration and filing fees 1,700
Trustees' fees and expenses 23,100
Other 10,427
-----------
Total expenses 3,032,079
-----------
Net investment income 16,999,366
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 31,873,608
Foreign currency transactions (41,486)
-----------
31,832,122
-----------
Net unrealized appreciation on:
Investments 34,944,885
Foreign currency translation of other assets
and liabilities 324,453
-----------
35,269,338
-----------
Net realized and unrealized gain 67,101,460
-----------
Net increase in net assets resulting from
operations $84,100,826
===========
</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 $ 16,999,366 $ 12,948,965
Net realized gain on investment and foreign currency transactions 31,832,122 12,565,625
Net unrealized appreciation 35,269,338 45,056,871
------------ ------------
Net increase in net assets resulting from operations 84,100,826 70,571,461
Distributions to shareholders:
From net investment income (12,811,622) (7,825,461)
From net realized gain (10,050,497) --
Fund share transactions (Note 2) 88,665,489 55,204,750
------------ ------------
Net increase in net assets 149,904,196 117,950,750
Net assets:
Beginning of year 406,122,968 288,172,218
------------ ------------
End of year $556,027,164 $406,122,968
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE> 51
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $32,121,334) $33,058,703
Cash 4,586
Receivables:
Fund shares sold 8,967
Dividends and interest 916,435
Unrealized gains on forward exchange contracts (Note 5) 108,433
---------
Total assets 34,097,124
---------
Liabilities:
Accrued expenses 51,243
---------
Total liabilities 51,243
---------
Net assets, at value $34,045,881
=========
Net assets consist of:
Undistributed net investment income $ 2,383,203
Net unrealized appreciation 1,044,307
Accumulated net realized loss (2,386,679)
Net capital paid in on shares of beneficial interest 33,005,050
---------
Net assets, at value $34,045,881
=========
Shares outstanding 2,927,751
=========
Net asset value per share ($34,045,881
divided by 2,927,751) $ 11.63
=========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1995
<TABLE>
<S> <C> <C>
Interest income: (net of $18,460 foreign taxes
withheld) $2,615,071
Expenses:
Management fees (Note 3) $162,273
Administrative fees (Note 3) 35,947
Reports to shareholders 5,125
Audit fees 12,000
Legal fees 3,100
Trustees' fees and expenses 1,325
Other 1,641
-------
Total expenses 221,411
--------
Net investment income 2,393,660
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 215,030
Foreign currency transactions (36,383)
-------
178,647
-------
Net unrealized appreciation on:
Investments 291,370
Foreign currency translation of other assets and
liabilities 100,958
-------
392,328
-------
Net realized and unrealized gain 570,975
--------
Net increase in net assets resulting from
operations $2,964,635
========
</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 $ 2,393,660 $ 2,229,422
Net realized gain on investment and foreign currency transactions 178,647 612,266
Net unrealized appreciation 392,328 1,506,931
--------- -----------
Net increase in net assets resulting from operations 2,964,635 4,348,619
Distributions to shareholders from net investment income (3,413,282) (1,445,139)
Fund share transactions (Note 2) 1,584,576 663,091
----------- -----------
Net increase in net assets 1,135,929 3,566,571
Net assets:
Beginning of year 32,909,952 29,343,381
----------- -----------
End of year $34,045,881 $32,909,952
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE> 52
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON MONEY MARKET FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value and cost $13,728,813
Cash 817
Receivables:
Fund shares sold 446,823
Interest 2,110
-----------
Total assets 14,178,563
-----------
Liabilities:
Payables for dividends 64,728
Accrued expenses 27,974
-----------
Total liabilities 92,702
-----------
Net assets (equivalent to $1.00 per share based on
14,085,861 shares of beneficial interest outstanding) $14,085,861
===========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Interest income $852,534
Expenses:
Management fees (Note 3) $55,132
Administrative fees (Note 3) 17,227
Custodian fees 397
Reports to shareholders 3,753
Audit fees 6,900
Legal fees 3,320
Other 347
-------
Total expenses 87,076
--------
Net investment income 765,458
Net realized gain on investments 269
--------
Net increase in net assets resulting from operations $765,727
========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 765,458 $ 1,124,377
Net realized gain (loss) from security transactions 269 (2,159)
----------- -----------
Net increase in net assets resulting from operations 765,727 1,122,218
Distributions to shareholders from net investment income (765,727) (1,122,218)
Fund share transactions (Note 2) (6,637,553) (12,366,721)
----------- -----------
Net decrease in net assets (6,637,553) (12,366,721)
Net assets:
Beginning of year 20,723,414 33,090,135
----------- -----------
End of year $14,085,861 $20,723,414
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE> 53
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Variable Products Series Fund (the Trust) is a Massachusetts business
trust and an open-end, diversified management investment company registered
under the Investment Company Act of 1940. The Trust consists of six series (the
Funds), each with its own investment objective and policies. The six funds of
the Trust are: Templeton Stock Fund, Templeton International Fund, Templeton
Developing Markets Fund, Templeton Asset Allocation Fund, Templeton Bond Fund
and Templeton Money Market Fund.
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 held by Templeton Stock, International, Developing Markets, Asset
Allocation and Bond Funds that are listed or traded on a recognized national or
foreign stock 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. Securities held
by Templeton Money Market Fund are valued using the amortized cost valuation
method, which involves valuing a portfolio security at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium.
B. FOREIGN EXCHANGE CONTRACTS:
Templeton International, Asset Allocation, and Bond Funds may enter into forward
exchange contracts and currency option contracts in order to hedge against
foreign exchange risks.
(i) Forward Exchange Contracts: These contracts are valued daily and each Fund's
equity therein, representing unrealized gain or loss on the contracts, is
included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
(ii) Currency Option Contracts: Options purchased are recorded as investments;
options written (sold) are accounted for as liabilities. When an option
expires, the premium (original option value) is realized as a gain if the
option was written or realized as a loss if the option was purchased. When
the exercise of an option results in a cash settlement, the difference
between the premium and the settlement proceeds is realized as a gain or
loss. When securities are acquired or delivered upon exercise of an option,
the acquisition cost or sale proceeds are adjusted by the amount of the
premium. When an option is closed, the difference between the premium and
the cost to close the position is realized as a gain or loss.
C. INDEXED SECURITIES:
The Asset Allocation Fund and Bond Fund may invest in debt instruments in which
the principal and/or interest is dependent on another factor such as a yield
curve, currency exchange rates or commodity prices. The Fund's objective in
holding these notes, commonly called structured notes, is to tailor the Fund's
investment based on specific risk and returns it wishes to assume while avoiding
unwanted risk or change the Fund's exposure to a particular foreign exchange
rate or the spread between two foreign exchange rates.
D. 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.
52
<PAGE> 54
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
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.
E. 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.
F. DISTRIBUTIONS TO SHAREHOLDERS:
Templeton Stock, International, Developing Markets, Asset Allocation and Bond
Funds normally pay annual dividends representing substantially all of their net
investment income and distribute 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. Templeton Money Market
Fund's net investment income (consisting principally of interest accrued or
discount earned less amortization of premium and estimated expenses) is declared
as a dividend daily, including weekends and holidays, immediately prior to the
determination of net asset value, and is paid monthly.
G. 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.
H. REPURCHASE AGREEMENTS:
The Funds, through their custodian, receive delivery of the underlying
securities, whose market is required to be at least 102% of the resale price at
the time of purchase. The Funds investment advisor, is responsible for
determining that the value of these underlying securities remain at least equal
to the resale price.
I. ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity 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.
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 Funds' shares were as
follows:
<TABLE>
<CAPTION>
TEMPLETON STOCK FUND
---------------------------------------------------
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 distributions 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>
53
<PAGE> 55
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL FUND
---------------------------------------------------
1996 1995
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold 15,869,480 $ 256,826,546 13,352,012 $186,603,778
Shares issued on reinvestment of distributions 524,440 8,134,054 160,096 2,063,645
Shares redeemed (2,621,355) (43,182,196) (1,526,461) (21,660,699)
---------- ------------ ---------- ------------
Net increase 13,772,565 $ 221,778,404 11,985,647 $167,006,724
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING MARKETS FUND
---------------------------------------------------
FOR THE PERIOD
MARCH 4, 1996
THROUGH
DECEMBER 31, 1996
------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C> <C> <C>
Shares sold 7,686,505 $ 73,253,158
Shares redeemed (25,642) (238,368)
--------- -----------
Net increase 7,660,863 $ 73,014,790
========= ===========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON ASSET ALLOCATION FUND
---------------------------------------------------
1996 1995
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 5,028,891 $ 96,250,257 4,076,702 $ 68,918,715
Shares issued on reinvestment of distributions 1,240,484 22,862,120 506,348 7,828,137
Shares redeemed (1,580,553) (30,446,888) (1,262,734) (21,542,102)
---------- ----------- ---------- -----------
Net increase 4,688,822 $ 88,665,489 3,320,316 $ 55,204,750
========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON BOND FUND
---------------------------------------------------
1996 1995
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 412,304 $ 4,557,713 468,705 $ 5,243,821
Shares issued on reinvestment of distributions 323,533 3,413,281 136,463 1,445,139
Shares redeemed (578,367) (6,386,418) (538,060) (6,025,869)
-------- ---------- -------- ----------
Net increase 157,470 $ 1,584,576 67,108 $ 663,091
======== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON MONEY MARKET FUND
----------------------------------------------------
1996 1995
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 35,278,602 $ 35,278,602 40,985,931 $ 40,985,931
Shares issued on reinvestment of distributions 708,580 708,580 1,116,228 1,116,228
Shares redeemed (42,624,735) (42,624,735) (54,468,880) (54,468,880)
----------- ----------- ----------- ------------
Net decrease (6,637,553) $ (6,637,553) (12,366,721) $(12,366,721)
=========== =========== =========== ============
</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), the investment manager for all the funds except
Templeton Developing Markets Fund, Templeton Asset Management Ltd. (TAML), the
Investment Manager for Templeton Developing Markets Fund, and Templeton Funds
Annuity Company (TFAC), the administrative manager for all of the funds.
Templeton Stock, International, Asset Allocation and Bond Funds each pay 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.
54
<PAGE> 56
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
On February 10, 1997, the Funds' shareholders approved an increase in management
fees, effective May 1, 1997, for the Templeton Stock Fund, Templeton
International Fund, and Templeton Asset Allocation Fund. Under the new fee
arrangements, Templeton Stock Fund and Templeton International Fund each pay 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.
Templeton Asset Allocation Fund pays a monthly investment management fee, equal
on an annual basis to .65% of its average daily net assets up to $200 million,
.585% of such assets from $200 million up to $1.3 billion, and .52% of such
assets in excess of $1.3 billion.
Each 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 Funds, 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. TAML and TFAC
have voluntarily agreed to reduce Templeton Developing Markets Fund's fees to
the extent necessary in order to limit total expenses to an annual rate of 1.70%
of the average net assets through May 1, 1997.
An officer of the Trust is a partner of Dechert Price & Rhoads, legal counsel
for the Trust, which firm received fees for the year ended December 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
The cost of securities for federal income tax purposes is the same as that shown
in the investment portfolios, except for International Fund and Developing
Markets Fund, whose cost for tax purposes is $564,314,144 and $73,449,203,
respectively. Realized gains and losses are reported on an identified cost
basis.
The aggregate gross unrealized appreciation and depreciation of portfolio
securities, based on cost for federal income tax purposes, and purchases and
sales of securities (excluding short-term securities) for the year ended
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON DEVELOPING ASSET TEMPLETON
TEMPLETON INTERNATIONAL MARKETS ALLOCATION BOND
STOCK FUND FUND FUND FUND
------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Unrealized appreciation $173,065,018 $132,339,926 $ 3,716,414 $109,395,862 $ 1,077,778
Unrealized depreciation (15,756,072) (11,981,856) (5,118,474) (13,685,039) (140,409)
------------ ------------ ----------- ------------ -----------
Net unrealized appreciation (depreciation) $157,308,946 $120,358,070 $(1,402,060) $ 95,710,823 $ 937,369
============ ============ =========== ============ ===========
Purchases $211,301,102 $230,905,959 $63,612,797 $338,976,140 $43,992,121
============ ============ =========== ============ ===========
Sales $123,058,974 $ 43,946,841 $ 2,350,093 $258,933,174 $43,149,200
============ ============ =========== ============ ===========
</TABLE>
At December 31, 1996, Bond Fund had tax basis capital losses of $2,039,250 which
may be carried over to offset future capital gains. Such losses expire December
31, 2002.
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During the year ended December 31, 1996, Templeton 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 risk to the Funds
with respect to their portfolio transactions from adverse changes in the
relationship between the U.S. 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 value and
interest rates and contract positions that are not exact offsets. The contract
amounts indicate the extent of the Funds' involvement in such contracts.
FORWARDS: A forward exchange contract is an agreement between two parties to
exchange different currencies at a specified rate at an agreed upon future date.
At December 31, 1996, the Asset Allocation and Bond Funds had outstanding
forward exchange contracts for the purchase and sale of currencies as set out
below. These contracts are reported in the financial statements at each Fund's
net equity, as measured by the difference between the forward exchange rates at
the reporting date and the forward exchange rates at the dates of entry into the
contract:
<TABLE>
<S> <C>
TEMPLETON ASSET ALLOCATION FUND
Contracts to sell:
12,000,000 German mark for 7,772,272 U.S. dollars, February 3, 1997 $( 3,473)
12,000,000 German mark for 7,815,044 U.S. dollars, February 5, 1997 (45,290)
--------
(48,763)
Unrealized gain from offsetting forward exchange contracts 381,698
--------
Net unrealized gain in forward exchange contracts $332,935
========
TEMPLETON BOND FUND
Net unrealized gain from offsetting forward exchange contracts $108,433
========
</TABLE>
55
<PAGE> 57
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 statements of assets and liabilities, including
the investment portfolios, of Templeton Stock Fund, Templeton International
Fund, Templeton Developing Markets Fund, Templeton Asset Allocation Fund,
Templeton Bond Fund and Templeton Money Market Fund series of Templeton Variable
Products Series Fund (the Trust) as of December 31, 1996, and the related
statements 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 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 Stock Fund, Templeton International Fund, Templeton Developing Markets
Fund, Templeton Asset Allocation Fund, Templeton Bond Fund and Templeton Money
Market Fund series of Templeton Variable Products Series Fund as of December 31,
1996, the results of their operations, the changes in their 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
56
<PAGE> 58
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
TEMPLETON STOCK SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in Templeton Stock Fund (identified cost
$179,384,808) $329,352,936
------------
Liabilities:
Accrued expenses due related parties 374,333
------------
Net assets $328,978,603
============
Accumulation units outstanding 132,391,979
============
Net asset value per unit $ 2.484883
============
</TABLE>
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
Dividends $ 5,615,980
Expenses:
Mortality and expense risk and administrative
charges 4,230,315
------------
Net investment income 1,385,665
Realized and unrealized gain on investments:
Net realized gain from share transactions $ 1,719,446
Net realized gain distribution from Fund 25,763,307
Net change in unrealized appreciation 29,236,460
--------------
Net realized and unrealized gain 56,719,213
------------
Net increase in net assets from operations $58,104,878
============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the periods ended December 31,
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,385,665 $ 241,153
Net realized gain 27,482,753 2,684,934
Net change in unrealized appreciation 29,236,460 54,558,056
-------------- ------------
Net increase in net assets from operations 58,104,878 57,484,143
Accumulation unit transactions:
Participant deposits 13,456,097 13,155,785
Participant transfers 2,720,653 10,498,003
Participant withdrawals (37,955,669) (29,718,626)
-------------- ------------
Net decrease from participant transactions (21,778,919) (6,064,838)
-------------- ------------
Total increase in net assets 36,325,959 51,419,305
Net assets:
Beginning of period 292,652,644 241,233,339
-------------- ------------
End of period $328,978,603 $292,652,644
============== ============
Participant accumulation unit transactions (in units):
Participant deposits 6,175,518 7,097,806
Participant transfers 931,089 6,158,732
Participant withdrawals (16,948,229) (15,894,569)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
57
<PAGE> 59
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
TEMPLETON INTERNATIONAL SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in Templeton International Fund (identified
cost $77,152,940) $114,608,473
------------
Liabilities:
Accrued expenses due related parties 130,328
------------
Net assets $114,478,145
============
Accumulation units outstanding 62,848,326
============
Net asset value per unit $ 1.821499
============
</TABLE>
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
Dividends $ 1,489,608
Expenses:
Mortality and expense risk and administrative
charges 1,410,917
-----------
Net investment income 78,691
Realized and unrealized gain on investments:
Net realized gain from share transactions $ 108,745
Net realized gain distribution from Fund 434,469
Net change in unrealized appreciation 20,199,153
-----------
Net realized and unrealized gain 20,742,367
-----------
Net increase in net assets from operations $20,821,058
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the periods ended December 31,
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income (loss) $ 78,691 $ (537,933)
Net realized gain 543,214 419,177
Net change in unrealized appreciation 20,199,153 11,150,673
------------ ------------
Net increase in net assets from operations 20,821,058 11,031,917
Accumulation unit transactions:
Participant deposits 4,729,888 5,709,743
Participant transfers 6,476,217 257,059
Participant withdrawals (6,247,179) (4,184,076)
------------ -----------
Net increase from participant transactions 4,958,926 1,782,726
------------ -----------
Total increase in net assets 25,779,984 12,814,643
Net assets:
Beginning of period 88,698,161 75,883,518
------------ -----------
End of period $114,478,145 $88,698,161
============ ===========
Participant accumulation unit transactions (in units):
Participant deposits 2,934,164 4,160,659
Participant transfers 4,100,617 190,011
Participant withdrawals (3,773,826) (2,977,608)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE> 60
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
TEMPLETON DEVELOPING MARKETS SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investment in Templeton Developing Markets Fund (identified
cost $1,043,799) $1,050,901
----------
Liabilities:
Accrued expenses due related parties 1,195
----------
Net assets $1,049,706
==========
Accumulation units outstanding 1,039,721
==========
Net asset value per unit $ 1.009604
==========
</TABLE>
STATEMENT OF OPERATIONS
for the period March 4, 1996 (commencement of operations) to December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
Dividends $ --
Expenses:
Mortality and expense risk and administrative charges 2,887
-------
Net investment loss (2,887)
Realized and unrealized gain on investments:
Net realized gain from share transactions $ 440
Net change in unrealized appreciation 7,102
------
Net realized and unrealized gain 7,542
-------
Net increase in net assets from operations $ 4,655
=======
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the period March 4, 1996 (commencement of operations) to December 31, 1996
<TABLE>
<S> <C>
Increase in net assets:
Operations:
Net investment loss $ (2,887)
Net realized gain 440
Net change in unrealized appreciation 7,102
----------
Net increase in net assets resulting from operations 4,655
Accumulation unit transactions:
Participant deposits 12,452
Participant transfers 1,032,869
Participant withdrawals (270)
----------
Net increase from participant transactions 1,045,051
----------
Total increase in net assets 1,049,706
Net assets:
Beginning of period --
----------
End of period $1,049,706
==========
Participant accumulation unit transactions (in units):
Participant deposits 12,449
Participant transfers 1,027,542
Participant withdrawals (270)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE> 61
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
TEMPLETON ASSET ALLOCATION SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in Templeton Asset Allocation Fund (identified
cost $93,469,428) $151,940,988
------------
Liabilities:
Accrued expenses due related parties 175,261
------------
Net assets $151,765,727
============
Accumulation units outstanding 65,842,936
============
Net asset value per unit $ 2.304966
============
</TABLE>
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
Dividends $ 4,389,083
Expenses:
Mortality and expense risk and administrative
charges 2,027,587
-----------
Net investment income 2,361,496
Realized and unrealized gain on investments:
Net realized gain from share transactions $ 1,922,688
Net realized gain distribution from fund 3,443,160
Net change in unrealized appreciation 15,661,290
-----------
Net realized and unrealized gain 21,027,138
-----------
Net increase in net assets from operations $23,388,634
-----------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the periods ended December 31,
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,361,496 $ 1,357,636
Net realized gain 5,365,848 701,083
Net change in unrealized appreciation 15,661,290 23,331,096
------------ -------------
Net increase in net assets resulting from operations 23,388,634 25,389,815
Accumulation unit transactions:
Participant deposits 3,814,080 6,249,518
Participant transfers (4,371,058) 649,951
Participant withdrawals (14,534,788) (10,605,951)
------------ ------------
Net decrease from participant transactions (15,091,766) (3,706,482)
------------ ------------
Total increase in net assets 8,296,868 21,683,333
Net assets:
Beginning of period 143,468,859 121,785,526
------------ ------------
End of period $151,765,727 $143,468,859
============ ============
Participant accumulation unit transactions (in units):
Participant deposits 1,824,205 3,513,751
Participant transfers (2,087,602) 396,067
Participant withdrawals (6,878,558) (5,825,984)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE> 62
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
TEMPLETON BOND SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in Templeton Bond Fund (identified cost
$19,188,417) $19,882,257
---------
Liabilities:
Accrued expenses due related parties 23,133
---------
Net assets $19,859,124
=========
Accumulation units outstanding 11,874,532
=========
Net asset value per unit $ 1.672413
=========
</TABLE>
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
Dividends $2,034,457
Expenses:
Mortality and expense risk and administrative
charges 266,513
--------
Net investment income 1,767,944
Realized and unrealized gain (loss) on
investments:
Net realized gain from share transactions $ 65,010
Net change in unrealized depreciation (339,894)
-------
Net realized and unrealized loss (274,884)
--------
Net increase in net assets from operations $1,493,060
========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the periods ended December 31,
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,767,944 $ 629,024
Net realized gain 65,010 35,668
Net change in unrealized appreciation (depreciation) (339,894) 1,695,419
--------- ---------
Net increase in net assets from operations 1,493,060 2,360,111
Accumulation unit transactions:
Participant deposits 395,604 981,131
Participant transfers 426,791 (228,814)
Participant withdrawals (2,027,353) (1,456,958)
--------- ---------
Net decrease from participant transactions (1,204,958) (704,641)
--------- ---------
Total increase in net assets 288,102 1,655,470
Net assets:
Beginning of period 19,571,022 17,915,552
--------- ---------
End of period $19,859,124 $19,571,022
========= =========
Participant accumulation unit transactions (in units):
Participant deposits 253,615 665,160
Participant transfers 268,583 (153,130)
Participant withdrawals (1,280,919) (989,280)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE> 63
PHOENIX HOME LIFE ACCUMULATION ACCOUNT
TEMPLETON MONEY MARKET SUB-ACCOUNT
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in Templeton Money Market Fund (identified cost
$14,085,861) $14,085,861
Dividends receivable 62,971
-----------
Total assets 14,148,832
-----------
Liabilities:
Accrued expenses due related parties 17,292
-----------
Net assets $14,131,540
===========
Accumulation units outstanding 10,596,971
===========
Net asset value per unit $ 1.333545
===========
</TABLE>
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends $771,482
Expenses:
Mortality and expense risk and administrative charges 218,563
--------
Net investment income $552,919
========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the periods ended December 31,
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 552,919 $ 827,420
----------- ------------
Accumulation unit transactions:
Participant deposits 6,603,501 5,338,600
Participant transfers (4,354,547) (12,987,410)
Participant withdrawals (9,373,530) (5,376,150)
----------- ------------
Net decrease from participant transactions (7,124,576) (13,024,960)
----------- ------------
Total decrease in net assets (6,571,657) (12,197,540)
Net assets:
Beginning of period 20,703,197 32,900,737
----------- ------------
End of period $14,131,540 $ 20,703,197
=========== ============
Participant accumulation unit transactions (in units):
Participant deposits 5,010,494 4,238,896
Participant transfers (3,285,148) (10,471,911)
Participant withdrawals (7,205,144) (4,255,761)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE> 64
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION
Phoenix Home Life Variable Accumulation Account (the Account) is a separate
investment account of Phoenix Home Life Mutual Insurance Company (Phoenix)
registered as a unit investment trust. The Account currently has six
Sub-accounts to which Templeton Investment Plus contract values may be allocated
and include the Templeton Stock, Templeton International, Templeton Developing
Markets, Templeton Asset Allocation, Templeton Bond and Templeton Money Market
which invest solely in a designated portfolio of Templeton Variable Products
Series Fund (the Fund). Each series of the Fund has distinct investment
objectives. Templeton Stock Fund is a capital growth common stock fund; the
Templeton International Fund invests in stocks and debt obligations of companies
and governments outside the United States; the Templeton Developing Markets Fund
seeks long-term capital appreciation by investing in equity securities of
issuers in countries having developing markets; the Templeton Asset Allocation
Fund invests in stocks and debt obligations of companies and governments and
money market instruments seeking high total return; the Templeton Bond Fund
seeks high current income through investing in debt securities, rated and
unrated, in any category of companies, government and government agencies, and
in debt securities which are convertible into common stock of such companies;
and the Templeton Money Market Fund seeks current income, stability of principal
and liquidity by investing in short-term money market instruments.
2. SIGNIFICANT ACCOUNTING POLICIES
A. VALUATION OF INVESTMENTS:
Investments are made exclusively in the Funds and are valued at the net asset
value per share of the Series.
B. INVESTMENT TRANSACTIONS AND RELATED INCOME:
Investment transactions are recorded on the trade date. Realized gains and
losses on sales of investments are determined on the last-in, first-out (LIFO)
cost basis of the investment sold. Dividends from the Fund are recorded on the
ex-dividend date.
C. INCOME TAXES:
The Account is not a separate entity from Phoenix and under current federal
income tax law, income arising from the Account is not taxed since reserves are
established equivalent to such income. Therefore, no provision for related
federal or state income taxes is required.
3. PURCHASES AND SALES OF SHARES OF TEMPLETON VARIABLE PRODUCTS SERIES FUND
Purchases and sales of the Fund for the period ended December 31, 1996
aggregated the following:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Templeton Stock Fund $ 59,440,249 $ 54,013,551
Templeton International Fund 22,431,305 16,923,750
Templeton Developing Markets Fund 1,181,062 137,703
Templeton Asset Allocation Fund 10,414,906 19,681,875
Templeton Bond Fund 4,752,914 4,187,984
Templeton Money Market Fund 35,621,649 42,182,027
</TABLE>
4. INVESTMENT ADVISORY FEES AND RELATED PARTY TRANSACTIONS
Phoenix provides all administrative services to the Account.
Phoenix assumes the risk that annuitants as a class may live longer than
expected and that its expenses may be higher than its deductions for such
expenses. In return for the assumption of these mortality and expense risks,
Phoenix charges each Sub-account the daily equivalent of 0.40% on an annual
basis of the current value of the Sub-account's net assets for mortality risks
assumed and the daily equivalent of 0.85% on an annual basis for expense risks
assumed.
The fees charged for mortality and expense risks assumed by Phoenix for the
Templeton Stock, Templeton International, Templeton Developing Markets,
Templeton Asset Allocation, Templeton Bond and Templeton Money Market
Sub-accounts aggregated $3,845,741, $1,282,652, $2,625, $1,843,261, $242,285 and
$198,694, respectively, for the year ended December 31, 1996.
63
<PAGE> 65
PHOENIX HOME LIFE VARIABLE ACCUMULATION ACCOUNT
Notes to Financial Statements
- --------------------------------------------------------------------------------
As compensation for administrative services provided to the Account, Phoenix
additionally receives $35 per year from each annuity contract prior to the
contract's date of maturity. This cost-based charge is deducted from the
Sub-account holding the assets of the participant or on a pro-rata basis from
two or more Sub-accounts in relation to their values under the contract. Upon a
full surrender of a contract, the entire annual administrative charge of $35 is
deducted regardless of when the surrender occurs. Phoenix Home Life received
$487,811 for administrative services provided for the year ended December 31,
1996.
Phoenix also charges each Sub-account the daily equivalent of 0.125% on an
annual basis of the current value of the Sub-account's net assets to cover its
variable costs of administration, such as printing and distribution of
participant mailings. The variable costs of administrative services provided by
Phoenix for the Templeton Stock, Templeton International, Templeton Developing
Markets, Templeton Asset Allocation, Templeton Bond and Templeton Money Market
Sub-accounts aggregated $384,574, $128,265, $262, $184,326, $24,228 and $19,869,
respectively, for the year ended December 31, 1996.
Franklin Templeton Funds Distributors, Inc. is the principal underwriter and
distributor for the Templeton Sub-accounts of the Account. Phoenix reimburses
Franklin Templeton Funds Distributors for expenses incurred as underwriter. On
surrender of a contract, surrender charges, which vary from 0-6% depending upon
the duration of each contract deposit, are deducted from the proceeds and are
paid to Phoenix as reimbursement for services provided. The surrender charges
deducted and paid to Phoenix were $644,944 for the year ended December 31, 1996.
Templeton Investment Counsel, Inc. (TICI) serves as investment manager of the
Templeton Stock, International, and Asset Allocation Funds; Templeton Global
Bond Manager, a division of TICI, serves as investment manager of the Templeton
Bond and Money Market Funds; and Templeton Asset Management Ltd., an independent
wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"), serves as
investment manager of the Templeton Developing Markets Fund. The investment
managers furnish the Funds with investment research and advice and supervise the
investment programs for the Funds in accordance with each Series' investment
objective, policies and restrictions. Templeton Stock, International, Asset
Allocation and Bond Funds each pay a monthly investment management fee, equal on
an annual basis, to 0.50% of the 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 daily
net assets; the Templeton Developing Markets Fund investment manager has agreed
in advance to reduce its fee so as to limit the total expenses of the Fund to an
annual rate of 1.70% of the Fund's average daily net assets until May 1, 1997.
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 the business manager, Templeton Fund Annuity Company (TFAC), a
monthly fee equivalent on an annual basis to 0.15% of the combined average daily
net assets of the Funds, reduced to 0.135% of such assets in excess of $200
million, 0.10% of such assets in excess of $700 million and 0.075% of such
assets in excess of $1.2 billion. TFAC provides certain administrative
facilities and services for the Funds.
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of withdrawals of amounts in the form of surrenders, death
benefits, transfers or annuity payments in excess of net purchase payments.
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (the Code),
a variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account on which the contract is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. Phoenix believes that the Account satisfies the current requirements of
the regulations, and it intends that the Account will continue to meet such
requirements.
64
<PAGE> 66
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors of Phoenix Home Life Mutual Insurance Company and
Participants of Phoenix Home Life Variable Accumulation Account
In our opinion the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the Templeton Stock
Sub-account, Templeton International Sub-account, Templeton Developing Markets
Sub-account, Templeton Asset Allocation Sub-account, Templeton Bond Sub-account
and Templeton Money Market Sub-account (constituting the Phoenix Home Life
Variable Accumulation Account, hereafter referred to as the "Account") at
December 31, 1996, the results of each of their operations for the periods then
ended and the changes in each of their net assets for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Account's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
[PRICE WATERHOUSE LLP SIGNATURE]
Hartford, Connecticut
February 12, 1997
65
<PAGE> 67
NOTES
--------
<PAGE> 68
NOTES
--------
<PAGE> 69
NOTES
--------
<PAGE> 70
FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUEST -- Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
GROWTH
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Mutual Discovery Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.
FUND ALLOCATOR SERIES:
Franklin Templeton
Conservative Target Fund
Franklin Templeton
Moderate Target Fund
Franklin Templeton
Growth Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FOR NON-U.S. INVESTORS:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
FOR CORPORATIONS:
Franklin Corporate Qualified
Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
VARIABLE ANNUITIES
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*TWO OR MORE FUND OPTIONS AVAILABLE: LONG-TERM PORTFOLIO, INTERMEDIATE-TERM
PORTFOLIO, A PORTFOLIO OF INSURED MUNICIPAL SECURITIES, AND/OR A HIGH YIELD
PORTFOLIO (CA) AND A MONEY MARKET PORTFOLIO (CA AND NY). **THE FUND MAY INVEST
UP TO 100% OF ITS ASSETS IN BONDS THAT PAY INTEREST SUBJECT TO THE FEDERAL
ALTERNATIVE MINIMUM TAX. ***PORTFOLIO OF INSURED MUNICIPAL SECURITIES. 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. 12/96.1
<PAGE> 71
[FRANKLIN TEMPLETON LOGO] BULK RATE
FRANKLIN TEMPLETON US POSTAGE
700 Central Avenue PAID
St. Petersburg, FL 33701 TMH,INC
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.
TIP A96 02197
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