ANNUAL REPORT
December 31, 1997
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
[LOGO](tm)
FRANKLIN TEMPLETON
<PAGE>
\ A WORD ABOUT RISK
All of the portfolios are subject to certain risks, which
will cause investment return and the value of your principal
to go up or down. Generally, investments offering the
potential for higher returns are accompanied by a higher
degree of risk. Stocks, and other equities representing an
ownership interest in a company, have historically
outperformed other asset classes over the long term but tend
to fluctuate more dramatically over the shorter term. Bonds,
and other debt obligations, are affected by changes in
interest rates and the creditworthiness of their issuers.
High yield, lower-rated ("junk") bonds generally have greater
price swings and higher default risks. Foreign investing,
especially in developing countries, has additional risks such
as changes in currency values and market price swings and
economic, political, or social instability. These, and other
risks to which particular portfolios may be subject such as
specialized industry sectors or use of complex securities,
are discussed in the Portfolio's prospectus. Your investment
representative can help you determine which portfolios may be
right for you.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Contract Owners............................... 2
Proxy Results........................................... 4
CLASS 2 Portfolio Reports
Templeton Stock Fund.................................. TS-1
Templeton International Fund.......................... TI-1
Templeton Developing Markets Fund..................... TD-1
Templeton Asset Allocation Fund....................... TA-1
</TABLE>
PLEASE NOTE:
Templeton Variable Products Series Fund ("the Trust") currently consists
of nine separate investment portfolios, eight of which offer Class 1 and
Class 2 shares. Only the portfolios and class listed in the above Table of
Contents are currently available under your insurance contract. Please
consult prospectuses for your insurance contract and the Trust for further
information.
TVPSF97A.EDGE
<PAGE>
LETTER TO CONTRACT OWNERS
Dear Contract Owner:
We are pleased to bring you the annual report of the Templeton Variable
Products Series Fund for the 12 months ended December 31, 1997.
During the year under review, benign inflation, relatively low interest
rates, and healthy corporate earnings characterized many economies around
the world. Although currency crises in Southeast Asia sent global stock
prices spiraling downward during the latter half of the period, equity
markets generally finished the year with an appreciable gain. Many bond
markets also strengthened, but were subject to severe volatility throughout
the period.
In the U.S., the Dow Jones(R) Industrial Average advanced 25%, marking its
third consecutive annual gain of more than 20% - a historical record. The
Standard & Poor's(R) 500 Stock Index rose even more, posting a return of
33.4% for the year. Even though large cap companies led the market, many
small cap stocks also fared well, as the Russell 2000(R) Index appreciated
22.4%.*
Many European companies continued to generate strong profits as a result of
privatization, restructuring, and cost-reduction programs. Corporations
there also experienced significant merger and acquisition activity, which
often accompanies rising shareholder value. We believe these factors
contributed to the strong advance of most European stock markets.
Switzerland, Italy, and the Netherlands (three countries whose markets rose
more than 20%) were among the region's leaders.*
2
<PAGE>
Emerging market equities posted mixed results during the period. Strong
exports, tight monetary policies, and increased capital flows into the
region helped Latin American markets deliver impressive returns. As measured
in U.S. dollars, Mexico's Bolsa Index increased 54.3% during the year and
Brazil's Bovespa Index 40.7%. However, bad banking loans and slowing
economies caused share prices to plummet in many Asian developing countries.
For example, Thailand's equity market fell 74.7%, Indonesia's 70.5%, and
South Korea's 69.2%.*
During the year, U.S. bond prices, benefiting from a strong dollar and
falling inflation, rallied sharply. European bond prices (as measured in
local currency terms) also moved higher, as government efforts to meet
standards for membership in the European Monetary Union led to lower
interest rates. However, fixed-income markets in developing countries
experienced greater appreciation, as bond prices rose substantially in local
currency terms due, we think, to market-oriented fiscal policies, improved
corporate earnings, and increased demand by investors searching for
high-yielding debt securities.
It is important to remember, of course, that securities markets always have
been and always will be subject to volatility. No one can predict exactly
how they will perform in the future. For this reason, we urge you to
exercise patience and focus not on short-term market movements, but on your
long-term investment goals.
We appreciate your participation in the Templeton Variable Products Series
Fund and look forward to serving your investment needs in the years to come.
Sincerely,
/s/ Chuck Johnson
Charles E. Johnson
President
Templeton Variable Products Series Fund
*Indices are unmanaged. Price appreciation is measured in U.S. dollars and
includes reinvested dividends. One cannot invest directly in an index. Dow
Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc.
3
<PAGE>
PROXY RESULTS
At the Special Meeting of Shareholders of the Templeton Variable Products
Series Fund held on February 10, 1997 shareholders (shareholders of record as
of December 9, 1996) voted as follows:
1. Election of Trustees:
<TABLE>
<CAPTION>
NO. OF SHARES % OF SHARES VOTED
------------------------------------------------------------------------
<S> <C> <C>
For 110,591,105.947 96.92%
Against 3,516,166.991 3.08%
Total 114,107,272.938 100.00%
</TABLE>
2. Ratification of the selection of McGladrey & Pullen, LLP, as the Trust's
independent auditors for the fiscal year end December 31, 1997:
<TABLE>
<CAPTION>
NO. OF SHARES % OF SHARES VOTED
------------------------------------------------------------------------
<S> <C> <C>
For 108,341,700.829 94.95%
Against 1,328,489.062 1.16%
Abstain 4,437,083.046 3.89%
Total 114,107,272.937 100.00%
</TABLE>
3. Approval of new Investment Management Agreements between Templeton
Investment Counsel, Inc. and the Trust on behalf of Templeton Stock Fund,
Templeton Asset Allocation Fund and Templeton International Fund,
respectively.
TEMPLETON STOCK FUND
<TABLE>
<CAPTION>
NO. OF SHARES % OF SHARES VOTED
------------------------------------------------------------------------
<S> <C> <C>
For 21,071,427.087 75.14%
Against 5,252,157.759 18.73%
Abstain 1,720,860.914 6.13%
Total 28,044,445.760 100.00%
</TABLE>
TEMPLETON ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
NO. OF SHARES % OF SHARES VOTED
------------------------------------------------------------------------
<S> <C> <C>
For 19,588,108.185 74.52%
Against 5,260,923.894 20.02%
Abstain 1,435,103.166 5.46%
Total 26,284,135.245 100.00%
</TABLE>
TEMPLETON INTERNATIONAL FUND
<TABLE>
<CAPTION>
NO. OF SHARES % OF SHARES VOTED
------------------------------------------------------------------------
<S> <C> <C>
For 27,866,054.448 75.76%
Against 7,366,868.129 20.03%
Abstain 1,548,933.496 4.21%
Total 36,781,856.073 100.00%
</TABLE>
Templeton Variable Products Series Fund (the "Trust") shares are sold only to
insurance company separate accounts to serve as investment options for variable
annuity or variable life insurance products ("Contracts"). Not all portfolios
are available in all contracts. Please refer to the Table of Contents page of
this report or your current applicable Contract prospectus for the fund(s)
available to you.
4
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective: 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.
- --------------------------------------------------------------------------------
During the 12 months under review, the Standard & Poor's(R) 500 Stock Index rose
33.4%, as moderate economic growth, low inflation and healthy corporate profits
provided a favorable environment for U.S. stocks.(1) One of the strongest
sectors was financial services, and we sold our holdings of American Express Co.
at a considerable gain and our shares of Federal National Mortgage Association
appreciated 51.7%. Because the high price/earnings ratios and low dividend
yields of U.S. equity markets made it difficult to identify investment bargains,
our domestic exposure decreased from 19.4% of total net assets on December 31,
1996, to 17.0% at the end of the year.
In Europe, many economies were restrained by fiscal policies designed to help
them meet European Monetary Union criteria. Encouraged by low interest rates and
benign inflation resulting from these requirements, investors bid up many stock
prices. Among the Fund's ten largest holdings, the share price of Kuoni Reisen
Holdings AG, B rose more than 54% and Alcatel Alsthom Cie Generale D'Electricite
SA appreciated 59% in 1997.(2) The strength of the European banking industry
prompted us to sell our holdings of Bankinter SA (Spain) and Fokus Bank AS
(Norway) at a profit, which also benefited the Fund.
Equity markets in Asia, however, performed poorly. Over the course of many years
of strong economic growth, institutional lenders and investors in developed
countries had lent large sums of capital to Asian corporations. As economies
there slowed, and currency crises occurred mid-year, investors feared that these
companies would be unable to pay back their loans. Consequently, many of them
sold their shares, causing stock markets to plummet. Fortunately, we had
maintained a relatively low weighting in Asia and were not impacted
significantly by these market declines.
1. Price appreciation includes reinvested dividends.
2. Price appreciation is measured in U.S. dollars.
TEMPLETON STOCK FUND
Geographic Distribution
Based on Total Net Assets
12/31/97
[Templeton Stock Fund Pie Chart]
Europe 53.4%
North America
20.4%
Latin America 9.8%
Asia 8.5%
Australia/
New Zealand 5.1%
Short-Term
Investments &
Other Net Assets
2.8%
TS-1
<PAGE>
Although Latin American equity markets experienced severe volatility toward the
end of the period, they generally advanced substantially during the year. The
telecommunications sector performed strongly, and our holdings of Telefonos de
Mexico SA, L, ADR and Telecomunicacoes Brasileiras SA, pfd. (Telebras)
appreciated significantly in value. In our opinion, demand for their services
will continue to increase, and deregulation of Brazil's telephone industry could
provide Telebras with strong growth potential.
Please remember that this discussion accurately reflects our views and opinions
as of December 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly, which may affect our strategies and
portfolio holdings. Although historic performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
It is important to remember that investments in foreign securities involve
special risks including changes in currency values, market price swings, and
economic, social, and political developments in the countries where the
portfolios are invested. Developing markets involve similar but higher risks
related to their smaller size and lesser liquidity. These risks are discussed in
the prospectus.
Sincerely,
/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Stock Fund
TEMPLETON STOCK FUND
Top 10 Holdings on 12/31/97
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
Federal National
Mortgage Association
Financial Services, U.S. 2.7%
Alcatel Alsthom Cie
Generale D'Electricite SA
Electrical & Electronics,
France 2.2%
Nycomed Amersham
PLC, fgn.
Health & Personal Care,
United Kingdom 2.0%
Telecom Italia SpA
Telecommunications, Italy 1.9%
Kuoni Reisen Holdings AG, B
Leisure & Tourism,
Switzerland 1.9%
Zuerich Versicherung, new
Insurance, Switzerland 1.8%
Rhone-Poulenc SA, A
Chemicals, France 1.8%
Telefonos de Mexico SA,
L, ADR
Telecommunications, Mexico 1.7%
Intel Corp.
Electronic Components &
Instruments, U.S. 1.6%
Telefonica de Espana SA
Telecommunications, Spain 1.6%
For a complete list of portfolio holdings, please see the
Fund's Statement of Investments.
TS-2
<PAGE>
PERFORMANCE SUMMARY
CLASS 2
Templeton Stock Fund - Class 2 delivered a 11.69% total return for the 12-month
period ended December 31, 1997. Total return of Class 2 shares represents the
cumulative or average annual change in value, assuming reinvestment of dividends
and capital gains. For periods of less than one year, aggregate annual figures
are shown. Past expense reductions by the manager increased returns.
The graph on the following page compares the performance of the Fund - Class 2
shares since inception with the unmanaged Morgan Stanley Capital International
(MSCI) World Index. The index includes approximately 1,500 companies
representing the stock markets of 23 countries, including the U.S., Canada, the
United Kingdom, and Japan. The graph also shows the Fund's performance versus
the Consumer Price Index (CPI), a commonly used measure of inflation. Please
remember that the Fund's performance differs from that of an index because an
index is not managed, does not contain cash (the Fund generally carries a
certain percentage of cash at any given time), and includes no sales charges or
management expenses. Of course, one cannot invest directly in an index, nor is
an index representative of the Fund's portfolio.
NOTE: PERFORMANCE REFLECTS THE FUND - CLASS 2'S OPERATING EXPENSES, BUT DOES NOT
INCLUDE ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE
CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. THESE CHARGES AND DEDUCTIONS, PARTICULARLY FOR
VARIABLE LIFE POLICIES, CAN HAVE A SIGNIFICANT EFFECT ON CONTRACT VALUES AND
INSURANCE BENEFITS. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS PROVIDED BY
THE INSURANCE COMPANY.
TS- 3
<PAGE>
<TABLE>
<CAPTION>
- NOTE: First period return inception date is 08/24/88
Monthly US Dollar US Dollar US Dollar
Templeton Variable Products Stock Fund MSCI World Index CPI Index
Acct 8154 Acct -1 Acct -152
<S> <C> <C> <C>
INCEPT 10,000 10,000 $10,000
Aug-88 10,000 9,798 $10,009
Sep-88 10,060 10,215 $10,077
Oct-88 10,370 10,897 $10,110
Nov-88 10,240 11,278 $10,119
Dec-88 10,270 11,382 $10,136
Jan-89 10,750 11,796 $10,187
Feb-89 10,560 11,723 $10,228
Mar-89 10,760 11,650 $10,286
Apr-89 11,011 11,921 $10,354
May-89 10,981 11,631 $10,413
Jun-89 10,810 11,501 $10,439
Jul-89 11,522 12,803 $10,464
Aug-89 11,812 12,495 $10,481
Sep-89 11,782 12,850 $10,514
Oct-89 11,101 12,423 $10,565
Nov-89 11,281 12,921 $10,590
Dec-89 11,772 13,339 $10,606
Jan-90 11,342 12,718 $10,715
Feb-90 11,412 12,175 $10,766
Mar-90 11,614 11,442 $10,825
Apr-90 11,175 11,279 $10,842
May-90 12,022 12,469 $10,867
Jun-90 12,033 12,382 $10,926
Jul-90 12,033 12,497 $10,967
Aug-90 11,165 11,329 $11,068
Sep-90 10,145 10,137 $11,161
Oct-90 10,012 11,085 $11,228
Nov-90 10,318 10,905 $11,253
Dec-90 10,492 11,136 $11,253
Jan-91 11,063 11,545 $11,321
Feb-91 11,808 12,616 $11,337
Mar-91 11,727 12,246 $11,354
Apr-91 11,737 12,344 $11,371
May-91 12,115 12,626 $11,404
Jun-91 11,496 11,848 $11,438
Jul-91 12,189 12,410 $11,455
Aug-91 12,367 12,372 $11,488
Sep-91 12,472 12,699 $11,540
Oct-91 12,630 12,907 $11,556
Nov-91 12,283 12,347 $11,589
Dec-91 13,354 13,248 $11,598
Jan-92 13,396 13,005 $11,615
Feb-92 13,826 12,782 $11,657
Mar-92 13,543 12,183 $11,716
Apr-92 13,994 12,354 $11,733
May-92 14,509 12,848 $11,749
Jun-92 14,155 12,420 $11,791
Jul-92 14,187 12,454 $11,817
Aug-92 13,887 12,759 $11,850
Sep-92 13,898 12,644 $11,883
Oct-92 13,769 12,305 $11,926
Nov-92 14,016 12,527 $11,942
Dec-92 14,305 12,631 $11,935
Jan-93 14,499 12,675 $11,993
Feb-93 14,831 12,977 $12,035
Mar-93 15,310 13,733 $12,078
Apr-93 15,550 14,371 $12,111
May-93 16,042 14,705 $12,128
Jun-93 16,130 14,584 $12,145
Jul-93 16,370 14,887 $12,144
Aug-93 17,442 15,571 $12,178
Sep-93 17,573 15,286 $12,203
Oct-93 18,317 15,710 $12,254
Nov-93 17,858 14,824 $12,263
Dec-93 19,170 15,552 $12,262
Jan-94 20,231 16,580 $12,296
Feb-94 19,509 16,368 $12,339
Mar-94 18,604 15,666 $12,381
Apr-94 18,892 16,152 $12,398
May-94 19,146 16,197 $12,405
Jun-94 18,593 16,155 $12,447
Jul-94 19,534 16,464 $12,481
Aug-94 20,242 16,963 $12,532
Sep-94 19,622 16,521 $12,565
Oct-94 19,821 16,993 $12,574
Nov-94 18,980 16,260 $12,591
Dec-94 18,748 16,420 $12,591
Jan-95 18,516 16,177 $12,640
Feb-95 19,074 16,416 $12,691
Mar-95 19,412 17,210 $12,733
Apr-95 20,156 17,813 $12,775
May-95 20,911 17,969 $12,800
Jun-95 21,395 17,967 $12,825
Jul-95 22,454 18,869 $12,825
Aug-95 22,218 18,452 $12,860
Sep-95 22,849 18,993 $12,884
Oct-95 22,330 18,698 $12,926
Nov-95 22,860 19,351 $12,917
Dec-95 23,480 19,920 $12,909
Jan-96 23,942 20,283 $12,984
Feb-96 24,335 20,411 $13,027
Mar-96 24,850 20,755 $13,094
Apr-96 25,390 21,246 $13,144
May-96 25,767 21,268 $13,169
Jun-96 25,956 21,380 $13,178
Jul-96 24,850 20,628 $13,203
Aug-96 25,717 20,870 $13,228
Sep-96 26,333 21,691 $13,270
Oct-96 26,735 21,845 $13,312
Nov-96 28,154 23,073 $13,337
Dec-96 28,745 22,708 $13,337
Jan-97 29,951 22,985 $13,379
Feb-97 29,844 23,254 $13,419
Mar-97 29,996 22,798 $13,453
Apr-97 29,830 23,547 $13,469
May-97 31,286 25,005 $13,461
Jun-97 32,978 26,255 $13,477
Jul-97 34,531 27,469 $13,493
Aug-97 32,576 25,636 $13,519
Sep-97 35,336 27,032 $13,552
Oct-97 32,188 25,614 $13,586
Nov-97 31,855 26,070 $13,578
Dec-97 32,104 26,392 $13,562
</TABLE>
* Index includes reinvested dividends.
** Source: U.S. Bureau of Labor Statistics, December 31, 1997.
TEMPLETON STOCK FUND - CLASS 2
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE SINCE CLASS 2
INCEPTION INCEPTION
1-YEAR* 3-YEAR* 5-YEAR* (8/24/88)* (5/1/97)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Annual Total
Return 11.69% 19.63% 17.55% 13.28% --
Cumulative Total Return 11.69% 71.24% 124.42% 221.04% --
Value of $10,000
Investment $11,169 $17,124 $22,442 $32,104 $10,708
Aggregate Total Return -- -- -- -- 7.08%
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------------------------------------------------------------------------------------------------
One-Year Total Return* 34.00% -2.20% 25.24% 22.48% 11.69%
</TABLE>
*Because Class 2 shares were not offered until May 1, 1997, performance shown
for periods prior to that date represents the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%.
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to their smaller size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance cannot predict or guarantee future results.
TS- 4
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 1
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $22.88 $20.83 $16.94 $17.53 $13.33
------------------------------------------------------------------
Income from investment operations:
Net investment income...................................... .47 .41 .40 .26 .23
Net realized and unrealized gain (loss).................... 2.11 3.88 3.80 (.64) 4.23
------------------------------------------------------------------
Total from investment operations............................ 2.58 4.29 4.20 (.38) 4.46
------------------------------------------------------------------
Less distributions from:
Net investment income...................................... (.40) (.40) (.27) (.21) (.25)
Net realized gains......................................... (1.87) (1.84) (.04) -- (.01)
------------------------------------------------------------------
Total distributions......................................... (2.27) (2.24) (.31) (.21) (.26)
------------------------------------------------------------------
Net asset value, end of year................................ $23.19 $22.88 $20.83 $16.94 $17.53
==================================================================
Total Return*............................................... 11.88% 22.48% 25.24% (2.20)% 34.00%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $732,248 $644,366 $498,777 $378,849 $298,392
Ratios to average net assets:
Expenses................................................... .81% .65% .66% .73% .73%
Net investment income...................................... 2.05% 2.06% 2.18% 1.81% 1.88%
Portfolio turnover rate..................................... 25.82% 23.40% 33.93% 5.10% 4.88%
Average commission rate paid**.............................. $.0077 $.0090 -- -- --
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
TS- 5
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
1997+
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 2
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................................................ $21.62
--------
Income from investment operations:
Net investment income............................................................................................ .06
Net realized and unrealized gain................................................................................. 1.47
--------
Total from investment operations.................................................................................. 1.53
--------
Net asset value, end of year...................................................................................... $23.15
========
Total Return*..................................................................................................... 7.08%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)................................................................................... $16,414
Ratios to average net assets:
Expenses......................................................................................................... 1.14%***
Net investment income............................................................................................ .75%***
Portfolio turnover rate........................................................................................... 25.82%
Average commission rate paid **................................................................................... $.0077
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
***ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TS- 6
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 95.1%
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp. ....................................................... Japan 94,000 $ 8,351,076
-------------
AUTOMOBILES 2.8%
Fiat SpA.......................................................... Italy 2,263,800 6,566,172
Ford Motor Co. ................................................... United States 130,000 6,329,375
Volvo AB, B....................................................... Sweden 290,500 7,793,108
-------------
20,688,655
-------------
BANKING 8.2%
Banco Bradesco SA, ADR............................................ Brazil 987,100 9,729,044
Banque Nationale de Paris......................................... France 181,204 9,631,496
Banque Nationale de Paris, ADR, 144A.............................. France 10,600 563,419
Credit Suisse Group, reg. ........................................ Switzerland 40,000 6,184,791
Deutsche Bank AG.................................................. Germany 128,000 8,950,750
HSBC Holdings PLC................................................. Hong Kong 466,562 11,499,980
*Philippine National Bank......................................... Philippines 2,293,225 5,039,433
PT Bank Bali, fgn. ............................................... Indonesia 2,925,000 385,568
Unidanmark AS, A.................................................. Denmark 125,900 9,242,356
-------------
61,226,837
-------------
BROADCASTING & PUBLISHING 0.9%
*Inchcape Marketing Services, fgn. ............................... Singapore 1,082,000 320,973
News Corp. Ltd. .................................................. Australia 96,920 535,030
News Corp. Ltd., ADR.............................................. Australia 260,000 5,801,250
-------------
6,657,253
-------------
BUILDING MATERIALS & COMPONENTS 1.8%
Cie de Saint Gobain............................................... France 52,600 7,472,460
Pioneer International Ltd. ....................................... Australia 2,273,600 6,208,823
-------------
13,681,283
-------------
BUSINESS & PUBLIC SERVICES 3.3%
Lex Service PLC................................................... United Kingdom 1,250,000 9,577,010
SGS Societe Generale de Surveillance Holdings Ltd., br. .......... Switzerland 4,700 9,003,523
Wheelabrator Technologies Inc. ................................... United States 370,000 5,943,125
-------------
24,523,658
-------------
CHEMICALS 3.2%
Akzo Nobel NV..................................................... Netherlands 65,000 11,207,062
Rhone-Poulenc SA, A............................................... France 292,716 13,112,276
-------------
24,319,338
-------------
DATA PROCESSING & REPRODUCTION 1.7%
*Bay Networks Inc. ............................................... United States 217,000 5,547,062
*Newbridge Networks Corp. ........................................ Canada 210,900 7,355,138
-------------
12,902,200
-------------
ELECTRICAL & ELECTRONICS 5.7%
Alcatel Alsthom Cie Generale D'Electricite SA..................... France 129,835 16,503,078
*DSC Communications Corp. ........................................ United States 338,600 8,126,400
Hitachi Ltd. ..................................................... Japan 274,000 1,951,597
Motorola Inc. .................................................... United States 123,700 7,058,631
Philips Electronics NV............................................ Netherlands 146,800 8,803,728
-------------
42,443,434
-------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.2%
BICC PLC.......................................................... United Kingdom 1,400,000 3,954,802
Intel Corp. ...................................................... United States 174,600 12,265,650
-------------
16,220,452
-------------
</TABLE>
TS- 7
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 4.1%
Societe Elf Aquitane SA........................................... France 92,520 $ 10,760,821
Total SA, B....................................................... France 97,135 10,571,309
Transportadora de Gas del Sur SA, B, ADR.......................... Argentina 77,700 869,269
YPF Sociedad Anonima, ADR......................................... Argentina 247,000 8,444,313
-------------
30,645,712
-------------
FINANCIAL SERVICES 4.4%
Axa SA............................................................ France 110,830 8,575,813
Federal National Mortgage Association............................. United States 353,600 20,177,300
Industrial Credit & Inv. Corp. of India, GDR, 144A................ India 310,700 4,015,798
-------------
32,768,911
-------------
FOOD & HOUSEHOLD PRODUCTS 1.1%
Oshawa Group Ltd. (The)........................................... Canada 464,900 8,133,025
-------------
FOREST PRODUCTS & PAPER 2.5%
*Asia Pacific Resources International Hldgs. Ltd., A.............. Indonesia 1,190,000 2,231,250
Assidomaen AB..................................................... Sweden 150,000 3,797,277
Carter Holt Harvey Ltd. .......................................... New Zealand 1,239,126 1,913,864
Enso OY, R........................................................ Finland 463,300 3,596,416
Fletcher Challenge Ltd. Forestry Division......................... New Zealand 5,226,124 4,339,400
Stora Kopparbergs Bergslags AB, B................................. Sweden 225,000 2,791,282
-------------
18,669,489
-------------
HEALTH & PERSONAL CARE 6.0%
Astra AB, A....................................................... Sweden 266,666 4,618,015
Astra AB, B....................................................... Sweden 338,667 5,694,284
Medeva PLC........................................................ United Kingdom 3,016,100 7,999,937
Novartis AG....................................................... Switzerland 6,933 11,241,549
*Nycomed Amersham PLC, fgn. ...................................... United Kingdom 400,900 15,166,240
-------------
44,720,025
-------------
INDUSTRIAL COMPONENTS 4.6%
BTR PLC........................................................... United Kingdom 1,721,500 5,272,956
Exide Corp. ...................................................... United States 349,100 9,032,962
Goodyear Tire & Rubber Co. ....................................... United States 110,000 6,998,750
*Granges AB....................................................... Sweden 421,725 6,612,774
Madeco Manufacturera de Cobre SA, ADR............................. Chile 263,500 4,018,375
Yamato Kogyo Co. Ltd. ............................................ Japan 462,000 2,777,591
-------------
34,713,408
-------------
INSURANCE 8.1%
GIO Australia Holdings Ltd. ...................................... Australia 3,041,605 7,776,825
HIH Winterthur International Holdings Ltd. ....................... Australia 1,659,296 3,557,959
ING Groep NV...................................................... Netherlands 228,461 9,622,257
Partnerre Ltd. ................................................... Bermuda 209,000 9,692,375
Reliastar Financial Corp. ........................................ United States 288,000 11,862,000
Torchmark Corp. .................................................. United States 120,000 5,047,500
Zuerich Versicherung, new......................................... Switzerland 28,400 13,523,347
-------------
61,082,263
-------------
LEISURE & TOURISM 1.8%
Kuoni Reisen Holding AG, B........................................ Switzerland 3,700 13,859,337
-------------
MACHINERY & ENGINEERING 1.0%
New Holland NV.................................................... Netherlands 282,300 7,463,306
-------------
</TABLE>
TS- 8
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING 3.8%
David Jones Ltd. ................................................. Australia 104,000 $ 117,263
Home Depot Inc. .................................................. United States 165,000 9,714,375
House of Fraser PLC............................................... United Kingdom 1,901,700 6,262,167
Macintosh NV...................................................... Netherlands 143,523 3,114,449
Storehouse PLC.................................................... United Kingdom 2,297,000 8,959,688
-------------
28,167,942
-------------
METALS & MINING 2.3%
Boehler Uddeholm AG............................................... Austria 86,000 5,041,602
*Chongqing Iron & Steel Ltd., H................................... China 16,905,000 2,312,466
Eramet SA......................................................... France 127,200 4,818,742
Usinas Siderugicas de Minas Gerais, Sponsored ADR................. Brazil 883,100 4,857,050
-------------
17,029,860
-------------
MULTI-INDUSTRY 4.1%
DESC SA de CV DESC, B............................................. Mexico 1,009,000 9,639,291
DESC SA de CV DESC, C............................................. Mexico 10,090 95,018
Hicom Holdings Bhd. .............................................. Malaysia 1,080,700 622,385
Hutchison Whampoa Ltd. ........................................... Hong Kong 865,600 5,428,850
Inchcape PLC...................................................... United Kingdom 1,619,100 4,294,519
Jardine Matheson Holdings Ltd. ................................... Hong Kong 525,369 2,679,382
Jardine Strategic Holdings Ltd. .................................. Hong Kong 48 127
La Cemento Nacional CA, GDR, 144A................................. Ecuador 4,600 956,800
La Cemento Nacional SA, GDR....................................... Ecuador 400 83,200
Metro Pacific Corp. MDI........................................... Philippines 74,246,196 2,053,228
Swire Pacific Ltd., B............................................. Hong Kong 5,040,500 5,106,198
-------------
30,958,998
-------------
REAL ESTATE 2.1%
National Health Investors Inc. ................................... United States 203,500 8,521,563
Summit Properties Inc., REIT...................................... United States 337,000 7,119,125
-------------
15,640,688
-------------
TELECOMMUNICATIONS 7.6%
Jasmine International Public Co. Ltd., fgn. ...................... Thailand 4,133,000 883,120
Nokia AB, A....................................................... Finland 90,300 6,313,642
Telecom Italia SpA................................................ Italy 2,254,800 14,423,582
Telefonica de Argentina SA, B, ADR................................ Argentina 291,000 10,839,750
Telefonica de Espana SA........................................... Spain 421,500 12,034,952
Telefonos de Mexico SA, L, ADR.................................... Mexico 221,800 12,434,663
-------------
56,929,709
-------------
TEXTILES & APPAREL 0.9%
Dawson International PLC.......................................... United Kingdom 3,450,000 3,824,645
*Fruit of the Loom Inc., A........................................ United States 125,000 3,203,125
-------------
7,027,770
-------------
TRANSPORTATION 3.5%
Air New Zealand Ltd., B........................................... New Zealand 2,053,300 4,113,253
Helikopter Services Group ASA..................................... Norway 585,000 7,138,983
Koninklijke Nedlloyd NV........................................... Netherlands 291,500 6,613,074
Peninsular & Oriental Steam Navigation Co......................... United Kingdom 706,700 8,025,934
-------------
25,891,244
-------------
</TABLE>
TS- 9
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 6.1%
Cia Sevillana de Electricidad SA.................................. Spain 275,921 $ 2,580,817
Endesa SA, br. ................................................... Spain 460,000 8,167,378
Evn Energie-Versorgung Niederoesterreich AG....................... Austria 63,600 8,358,152
Hong Kong Electric Holdings Ltd. ................................. Hong Kong 1,974,500 7,504,068
Iberdrola SA...................................................... Spain 706,000 9,291,303
VEBA AG........................................................... Germany 140,000 9,533,074
-------------
45,434,792
-------------
WHOLESALE & INTERNATIONAL TRADE 0.2%
Inchcape Bhd., fgn. .............................................. Singapore 1,082,000 1,662,640
-------------
TOTAL COMMON STOCKS
(COST $568,075,538)....................................... 711,813,305
-------------
PREFERRED STOCKS 2.1%
News Corp. Ltd., pfd. ............................................ Australia 250,067 1,237,680
News Corp. Ltd., pfd., ADR........................................ Australia 130,000 2,583,750
Telecomunicacoes Brasileiras SA, pfd. ............................ Brazil 102,379,477 11,677,709
-------------
TOTAL PREFERRED STOCKS (COST $4,552,202).................... 15,499,139
-------------
<CAPTION>
PRINCIPAL
AMOUNT**
-----------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS
(COST $20,412,427) 2.7%
U.S. Treasury Bills, 4.85% to 5.24% with maturities to 3/19/98.... United States $20,570,000 20,405,946
-------------
TOTAL INVESTMENTS
(COST $593,040,167) 99.9%.................................. 747,718,390
OTHER ASSETS, LESS LIABILITIES 0.1%........................ 943,589
-------------
TOTAL NET ASSETS 100.0%.................................... $ 748,661,979
=============
</TABLE>
*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS.
See Notes to Financial Statements.
TS- 10
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(cost $593,040,167) $ 747,718,390
Cash 193,338
Receivables:
Fund shares sold 485,690
Dividends and interest 1,818,179
Other assets 2,790
------------
Total assets 750,218,387
------------
Liabilities:
Payables:
Investment securities purchased 662,893
Fund shares redeemed 9,464
To affiliates 505,519
Other liabilities 378,532
------------
Total liabilities 1,556,408
------------
Net assets, at value $ 748,661,979
============
Net assets consist of:
Undistributed net investment income $ 15,048,456
Net unrealized appreciation 154,678,223
Accumulated net realized gain 64,631,375
Beneficial shares 514,303,925
------------
Net assets, at value $ 748,661,979
============
Class 1:
Net asset value per share
($732,247,872 / 31,577,825 shares
outstanding) $ 23.19
============
Class 2:
Net asset value per share ($16,414,107
/ 708,995 shares outstanding) $ 23.15
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of
$1,850,447)
Dividends $18,866,558
Interest 2,228,566
-----------
Total investment income $21,095,124
Expenses:
Management fees (Note 3) 4,629,013
Administrative fees (Note 3) 727,351
Distribution fees (Note 3)
Class 2 14,095
Custodian fees 267,153
Reports to shareholders 269,825
Professional fees (Note 3) 52,140
Trustees' fees and expenses 26,050
Other 18,523
-----------
Total expenses 6,004,150
-----------
Net investment income 15,090,974
-----------
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments 65,242,556
Foreign currency transactions (582,671)
-----------
Net realized gain 64,659,885
Net unrealized
depreciation on
investments (2,630,723)
-----------
Net realized and unrealized gain 62,029,162
-----------
Net increase in net assets
resulting
from operations $77,120,136
===========
</TABLE>
See Notes to Financial Statements.
TS- 11
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................................ $ 15,090,974 $ 11,586,443
Net realized gain on investments and foreign currency transactions............... 64,659,885 53,364,032
Net unrealized appreciation/(depreciation) on investments........................ (2,630,723) 50,486,029
------------ ------------
Net increase in net assets resulting from operations.......................... 77,120,136 115,436,504
------------ ------------
Distributions to shareholders from:
Net investment income
Class 1......................................................................... (11,299,102) (9,701,533)
Net realized gains
Class 1......................................................................... (53,491,951) (44,505,784)
Fund share transactions (Note 2):
Class 1......................................................................... 75,008,241 84,359,449
Class 2......................................................................... 16,958,890 --
------------ ------------
Net increase in net assets.................................................... 104,296,214 145,588,636
------------ ------------
Net assets:
Beginning of year................................................................. 644,365,765 498,777,129
------------ ------------
End of year....................................................................... $748,661,979 $644,365,765
============ ============
Undistributed net investment income included in net assets:
End of year....................................................................... $ 15,048,456 $ 11,508,408
============ ============
</TABLE>
See Notes to Financial Statements.
TS- 12
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Stock Fund (the Fund) is a separate, diversified series of Templeton
Variable Products Series Fund (the Trust), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
capital growth through a policy of investing primarily in common stocks issued
by companies, large and small, in various nations throughout the world. The
following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the funds comprising
the trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
TS- 13
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)
2. BENEFICIAL SHARES
The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold........................................................ 4,159,792 $ 96,416,712 4,324,078 $ 89,638,950
Shares issued on reinvestment of distributions..................... 2,970,704 64,791,053 2,791,314 54,207,317
Shares redeemed.................................................... (3,715,179) (86,199,524) (2,892,776) (59,486,818)
-------------------------------------------------------------
Net increase....................................................... 3,415,317 $ 75,008,241 4,222,616 $ 84,359,449
=============================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997*
--------------------------
SHARES AMOUNT
--------------------------
<S> <C> <C>
CLASS 2 SHARES:
Shares sold........................................................ 780,245 $ 18,686,201
Shares redeemed.................................................... (71,250) (1,727,311)
--------------------------
Net increase....................................................... 708,995 $ 16,958,890
==========================
</TABLE>
*Effective date of Class 2 shares was May 1, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton
Investment Councel, Inc. (TICI), Templeton Funds Annuity Company (TFAC) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.
Effective May 1, 1997, the Fund pays an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>
Prior to May 1, 1997, the Fund paid an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
TS- 14
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)
The Fund pays its allocated share of an administrative fee to TFAC based on the
Trust's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.
Included in professional fees are legal fees of $10,140 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation...................................................................... $221,096,222
Unrealized depreciation...................................................................... (66,417,999)
------------
Net unrealized appreciation.................................................................. $154,678,223
============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $224,516,764 and $177,971,052, respectively.
TS- 15
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Templeton Stock Fund, series of Templeton
Variable Products Series Fund (the Trust) as of December 31, 1997, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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 the
Templeton Stock Fund, series of Templeton Variable Products Series Fund as of
December 31, 1997, the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998
TS- 16
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
10.32% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
TS- 17
<PAGE>
This page intentionally left blank.
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective: 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.
- --------------------------------------------------------------------------------
Most global stock markets turned in another year of strong performance in 1997.
Spurred by a favorable interest rate environment, healthy earnings, and high
levels of liquidity, most markets generated positive returns. On a macro level,
Europe benefited from tight fiscal policies, export-led economic recoveries, and
lower interest rates as governments moved toward achieving the January 1999
European Monetary Union convergence criteria. Many European companies responded
to global competition through long-overdue restructuring. The success of these
efforts were perhaps best illustrated by the exceptionally strong performance of
European banks. For example, the shares of Bank Austria AG new, pfd., 144A, the
Fund's largest holding, appreciated more than 44% between June 6 and the end of
the reporting period.(1) Our holdings of Merita Ltd., A (Finland), National
Westminster Bank PLC (United Kingdom), and Unidanmark AS (Denmark) also rose
substantially in value over the course of the year. During the reporting period,
we initiated a position in Axa SA, a French financial services company operating
in Europe, Asia, and North America, and sold our shares of Bankinter SA (Spain),
Barclays PLC (United Kingdom), and ABN AMRO NV (Netherlands) at a profit.
Many Latin American equity markets also advanced, driven by strong corporate
profits, positive liquidity, and relatively low valuations. Accelerating
privatization and regulatory reform helped push the prices of many
telecommunications stocks higher, including our holdings of Telecomunicacoes
Brasileiras SA, pfd. and Telefonos de Mexico SA, L, ADR. In our opinion, demand
for telecommunication services should grow, which would bode well for these
companies. New bargains purchased during the year included the Mexican
conglomerate Alfa SA de CV, A and the Brazilian metals company Vale do Rio Doce,
ADR.
1. Price appreciation is measured in U.S. dollars.
TEMPLETON INTERNATIONAL FUND
[Templeton International Fund Pie Chart]
Geographic Distribution Based on Total Net Assets 12/31/97
Europe 59.3%
Latin America 10.5%
Asia 8.1%
Australia/New Zealand 4.5%
North America 4.3%
Middle East/Africa 1.1%
Short-Term Investments & Other Net Assets 12.2%
TI-1
<PAGE>
Asian stock markets, however, fell sharply during the reporting period. In July
1997, Thailand devalued the baht, and investor concerns about this, as well as
the country's low exports and bad bank loans, led to substantial declines in its
market. The devaluation of the baht highlighted similar problems (high foreign
debt levels, import balances and weak banking systems) in other Asian countries,
triggering several other devaluations. By year end, the equity markets of
Malaysia, Indonesia and the Philippines had each fallen more than 60% since the
beginning of the year.(2) This situation also adversely affected the Japanese
and Hong Kong markets, whose strong currencies put their goods at a competitive
disadvantage. Fortunately, we had viewed Southeast Asian markets as relatively
expensive prior to these crises and had found few companies whose stock prices
seemed attractive. Therefore, we were not significantly impacted by these market
declines.
Consistent with our history of low portfolio turnover, we made few major changes
to the Fund's geographic weightings during the year. For example, our European
exposure decreased from 61.0% of total net assets to 59.3%, our exposure in Asia
from 10.1% to 8.1%, and in Australia/New Zealand from 6.7% to 4.5%. However,
relatively low price-to-earnings ratios encouraged us to initiate new positions
in several Brazilian and Mexican companies, and our Latin American exposure
increased from 5.9% to 10.5%.
Looking forward, we are concerned about current stock valuations, but we are
optimistic about the long-term potential of international equity markets. Our
analysts continue to scour the globe looking for out-of-favor securities trading
at depressed levels relative to their long-term "normalized" earnings. With many
Asian stock markets down more than 50% in U.S. dollar terms, we are beginning to
identify potential bargains. To us, normalized represents what a company could
earn in the middle of a typical economic cycle, and requires us to estimate
earnings and cash flow for the next five years. We believe that such an approach
could produce superior returns over the long term.
2. Price appreciation is measured in U.S. dollars and includes reinvested
dividends, if any.
TEMPLETON
INTERNATIONAL FUND
Top 10 Holdings on 12/31/97
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
Bank Austria AG,
new, pfd., 144A
Banking, Austria 2.2%
Merita Ltd., A
Banking, Finland 1.9%
Zuerich Versicherung, new
Insurance, Switzerland 1.8%
Telecom Italia SpA, di Risp
Telecommunications, Italy 1.7%
Axa SA
Financial Services, France 1.7%
Skandia Foersaekrings AB
Insurance, Sweden 1.6%
Telecomunicacoes
Brasileiras SA, pfd.
Telecommunications, Brazil 1.5%
Philips Electronics NV
Electrical & Electronics,
Netherlands 1.4%
National Westminster
Bank PLC
Banking, United Kingdom 1.4%
Rhone-Poulenc SA, A
Chemicals, France 1.3%
For a complete list of portfolio holdings, please see the
Fund's Statement of Investments.
TI-2
<PAGE>
Please remember that this discussion accurately reflects our views and opinions
as of December 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly, which may affect our strategies and
portfolio holdings. Although historic performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
It is important to remember that investments in foreign securities involve
special risks including changes in currency values, market price swings, and
economic, social, and political developments in the countries where the
portfolios are invested. Developing markets involve similar but higher risks
related to their smaller size and lesser liquidity. Small-company securities may
have greater price swings than mid-sized or large company securities. These
risks are discussed in the prospectus.
Sincerely,
/s/ Peter A. Nori
Peter A. Nori
Portfolio Manager
Templeton International Fund
TI- 3
<PAGE>
PERFORMANCE SUMMARY
CLASS 2
Templeton International Fund - Class 2 delivered a 13.73% total return for the
12-month period ended December 31, 1997. Total return of Class 2 shares
represents the cumulative or average annual change in value, assuming
reinvestment of dividends and capital gains. For periods of less than one year,
aggregate annual figures are shown. Past expense reductions by the manager
increased returns.
The graph on the following page compares the performance of the Fund - Class 2
shares since inception with the unmanaged Morgan Stanley Capital International
Europe, Australasia, Far East (MSCI EAFE) Index. The index includes
approximately 1,000 companies representing the stock markets of 21 countries
including Germany, France, Australia, New Zealand, and Japan. The graph also
shows the Fund's performance versus the Consumer Price Index (CPI), a commonly
used measure of inflation. Please remember that the Fund's performance differs
from that of an index because an index is not managed, does not contain cash
(the Fund generally carries a certain percentage of cash at any given time), and
includes no sales charges or management expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
NOTE: PERFORMANCE REFLECTS THE FUND - CLASS 2'S OPERATING EXPENSES, BUT DOES NOT
INCLUDE ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE
CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. THESE CHARGES AND DEDUCTIONS, PARTICULARLY FOR
VARIABLE LIFE POLICIES, CAN HAVE A SIGNIFICANT EFFECT ON CONTRACT VALUES AND
INSURANCE BENEFITS. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS PROVIDED BY
THE INSURANCE COMPANY.
TI- 4
<PAGE>
<TABLE>
<CAPTION>
- NOTE: First period return inception date is 05/01/92
Monthly US Dollar US Dollar US Dollar
Templeton Variable Products International Fund MSCI EAFE Index CPI Index
Acct 8523 Acct -2 Acct -152
<S> <C> <C> <C>
INCEPT 10,000 10,000 $10,000
May-92 9,960 10,649 $10,013
Jun-92 9,720 10,147 $10,049
Jul-92 9,570 9,891 $10,071
Aug-92 9,470 10,514 $10,099
Sep-92 9,270 10,310 $10,127
Oct-92 9,170 9,773 $10,163
Nov-92 9,250 9,868 $10,177
Dec-92 9,390 9,921 $10,171
Jan-93 9,440 9,923 $10,221
Feb-93 9,740 10,226 $10,257
Mar-93 10,040 11,120 $10,293
Apr-93 10,370 12,178 $10,321
May-93 10,640 12,439 $10,336
Jun-93 10,580 12,248 $10,350
Jul-93 10,770 12,679 $10,350
Aug-93 11,610 13,366 $10,379
Sep-93 11,570 13,069 $10,400
Oct-93 12,460 13,475 $10,443
Nov-93 12,510 12,300 $10,450
Dec-93 13,830 13,190 $10,450
Jan-94 14,610 14,308 $10,479
Feb-94 14,040 14,272 $10,515
Mar-94 13,328 13,660 $10,551
Apr-94 13,461 14,242 $10,566
May-94 13,543 14,164 $10,572
Jun-94 13,113 14,367 $10,608
Jul-94 13,880 14,509 $10,636
Aug-94 14,402 14,855 $10,680
Sep-94 14,105 14,390 $10,708
Oct-94 14,290 14,873 $10,716
Nov-94 13,666 14,162 $10,730
Dec-94 13,522 14,253 $10,730
Jan-95 13,164 13,710 $10,772
Feb-95 13,338 13,674 $10,815
Mar-95 13,338 14,530 $10,851
Apr-95 13,990 15,080 $10,887
May-95 14,425 14,905 $10,909
Jun-95 14,611 14,647 $10,930
Jul-95 15,335 15,563 $10,930
Aug-95 14,953 14,973 $10,959
Sep-95 15,335 15,269 $10,980
Oct-95 14,963 14,863 $11,016
Nov-95 15,232 15,280 $11,008
Dec-95 15,656 15,900 $11,001
Jan-96 16,122 15,969 $11,066
Feb-96 16,349 16,027 $11,102
Mar-96 16,391 16,371 $11,159
Apr-96 16,993 16,851 $11,202
May-96 17,225 16,546 $11,223
Jun-96 17,362 16,642 $11,230
Jul-96 16,740 16,160 $11,252
Aug-96 17,331 16,200 $11,273
Sep-96 17,668 16,634 $11,309
Oct-96 18,017 16,468 $11,345
Nov-96 18,967 17,128 $11,366
Dec-96 19,421 16,911 $11,366
Jan-97 19,684 16,323 $11,402
Feb-97 19,926 16,594 $11,436
Mar-97 20,080 16,658 $11,465
Apr-97 20,080 16,751 $11,479
May-97 20,957 17,845 $11,472
Jun-97 22,207 18,833 $11,485
Jul-97 23,161 19,141 $11,499
Aug-97 22,054 17,716 $11,521
Sep-97 23,863 18,712 $11,550
Oct-97 21,955 17,278 $11,579
Nov-97 21,845 17,106 $11,572
Dec-97 22,087 17259.52 $11,558
</TABLE>
* Index includes reinvested dividends.
** Source: U.S. Bureau of Labor Statistics, December 31, 1997.
TEMPLETON INTERNATIONAL FUND - CLASS 2
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE SINCE CLASS 2
INCEPTION INCEPTION
1-YEAR* 3-YEAR* 5-YEAR* (5/1/92)* (5/1/97)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Annual Total
Return 13.73% 17.76% 18.66% 15.01% --
Cumulative Total Return 13.73% 63.33% 135.22% 120.87% --
Value of $10,000
Investment $11,373 $16,333 $23,522 $22,087 $10,946
Aggregate Total Return -- -- -- -- 9.46%
12/31/94 12/31/95 12/31/96 12/31/97
-------------------------------------------------------------------------------------------------
One-Year Total Return -2.22% 15.78% 24.04% 13.73%
</TABLE>
*Because Class 2 shares were not offered until May 1, 1997, performance shown
for periods prior to that date represents the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%.
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to their smaller size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance cannot predict or guarantee future results.
TI- 5
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 1
(For a share outstanding throughout the year)
Net asset value, beginning of year.............................. $18.40 $15.13 $13.22 $13.83 $9.39
--------------------------------------------------------------
Income from investment operations:
Net investment income.......................................... .49 .43 .23 .12 .10
Net realized and unrealized gain (loss)........................ 2.01 3.15 1.83 (.42) 4.34
--------------------------------------------------------------
Total from investment operations................................ 2.50 3.58 2.06 (.30) 4.44
--------------------------------------------------------------
Less distributions from:
Net investment income.......................................... (.51) (.24) (.10) (.08) --
Net realized gains............................................. (.21) (.07) (.05) (.23) --
--------------------------------------------------------------
Total distributions............................................. (.72) (.31) (.15) (.31) --
--------------------------------------------------------------
Net asset value, end of year.................................... $20.18 $18.40 $15.13 $13.22 $13.83
==============================================================
Total Return*................................................... 13.95% 24.04% 15.78% (2.22)% 47.28%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)................................. $938,410 $682,984 $353,141 $150,090 $43,877
Ratio to average net assets:
Expenses....................................................... .81% .65% .71% .83% .95%
Net investment income.......................................... 2.70% 3.23% 2.36% 1.89% 1.62%
Portfolio turnover rate......................................... 16.63% 9.46% 5.19% 6.32% 15.65%
Average commission rate paid**.................................. $.0009 $.0035 -- -- --
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
TI-6
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
1997+
-------
<S> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 2
(For a share outstanding throughout the year)
Net asset value, beginning of year............................................................................... $18.40
-------
Income from investment operations:
Net investment income........................................................................................... .07
Net realized and unrealized gain................................................................................ 1.67
-------
Total from investment operations................................................................................. 1.74
-------
Net asset value, end of year..................................................................................... $20.14
=======
Total Return*.................................................................................................... 9.46%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's).................................................................................. $17,606
Ratios to average net assets:
Expenses........................................................................................................ 1.13%***
Net investment income........................................................................................... 1.14%***
Portfolio turnover rate.......................................................................................... 16.63%
Average commission rate paid**................................................................................... $.0009
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
***ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TI-7
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 82.6%
AEROSPACE & MILITARY TECHNOLOGY 0.3%
Hong Kong Aircraft Engineering Co. Ltd............................ Hong Kong 1,069,000 $ 2,690,089
------------
APPLIANCES & HOUSEHOLD DURABLES 0.2%
Sony Corp......................................................... Japan 21,000 1,865,666
------------
AUTOMOBILES 4.0%
Fiat SpA.......................................................... Italy 3,052,500 8,853,803
Regie Nationale des Usines Renault SA............................. France 296,000 8,326,460
Volkswagen AG..................................................... Germany 15,600 8,714,842
Volvo AB, B....................................................... Sweden 455,000 12,206,073
------------
38,101,178
------------
BANKING 12.5%
Argentaria Corporacion Bancaria de Espana SA...................... Spain 135,600 8,250,817
Banco Bradesco SA BBD, rts........................................ Brazil 36,769,448 131,784
Banco Popular Espanol SA.......................................... Spain 64,000 4,473,909
Bangkok Bank Public Co. Ltd., fgn................................. Thailand 373,800 958,462
Banque Nationale de Paris......................................... France 188,986 10,045,131
Banque Nationale de Paris, ADR, 144A.............................. France 11,800 627,203
Canadian Imperial Bank of Commerce................................ Canada 320,000 9,987,054
Credicorp Ltd..................................................... Peru 265,600 4,780,800
Credit Commercial de France....................................... France 51,200 3,509,180
Credit Suisse Group, reg.......................................... Switzerland 10,000 1,546,198
Daegu Bank Co. Ltd................................................ South Korea 42,000 94,655
Den Norske Bank................................................... Norway 1,880,000 8,871,051
HSBC Holdings PLC................................................. Hong Kong 35,800 8,824,106
Merita Ltd., A.................................................... Finland 3,400,000 18,593,555
National Bank of Canada........................................... Canada 440,000 7,266,366
National Westminster Bank PLC..................................... United Kingdom 787,342 13,053,832
PT Bank Bali, fgn................................................. Indonesia 4,210,000 554,955
PT Bank Pan Indonesia TBK......................................... Indonesia 500,000 72,727
Shinhan Bank Co. Ltd.............................................. South Korea 30,600 136,391
Sparbanken AB, A.................................................. Sweden 152,000 3,455,459
*Unibanco Uniao de Bancos Brasileiros SA, GDR..................... Brazil 99,500 3,202,656
Unidanmark AS, A.................................................. Denmark 150,000 11,011,544
------------
119,447,835
------------
BROADCASTING & PUBLISHING 0.3%
News Corp. Ltd., ADR.............................................. Australia 125,200 2,793,525
------------
CHEMICALS 2.9%
Courtaulds PLC.................................................... United Kingdom 1,880,000 9,185,718
European Vinyls Corporation Evc International NV.................. Netherlands 42,900 952,087
Kemira OY, 144A................................................... Finland 563,632 5,223,412
Rhone-Poulenc SA, A............................................... France 279,800 12,533,701
------------
27,894,918
------------
DATA PROCESSING & REPRODUCTION 0.7%
*Newbridge Networks Corp.......................................... Canada 180,000 6,277,500
------------
ELECTRICAL & ELECTRONICS 2.8%
ABB AG, br........................................................ Switzerland 4,000 5,021,722
Alcatel Alsthom Cie Generale D'Electricite SA..................... France 36,000 4,575,891
Hitachi Ltd....................................................... Japan 500,000 3,561,308
Philips Electronics NV............................................ Netherlands 218,000 13,073,657
Tadiran Ltd., ADR................................................. Israel 28,240 998,990
------------
27,231,568
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.7%
BICC PLC.......................................................... United Kingdom 2,280,000 6,440,678
------------
</TABLE>
TI-8
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 2.7%
Societe Elf Aquitane SA........................................... France 87,200 $ 10,142,062
Total SA, B....................................................... France 70,000 7,618,177
YPF Sociedad Anonima, ADR......................................... Argentina 228,600 7,815,262
------------
25,575,501
------------
FINANCIAL SERVICES 3.2%
Axa SA............................................................ France 208,300 16,117,855
Julius Baer Holdings AG........................................... Switzerland 5,100 9,455,752
Leichtenstein Global Trust AG..................................... Switzerland 6,500 4,024,561
London Pacific Group Ltd.......................................... United Kingdom 20,630 59,971
Peregrine Investments Holdings Ltd................................ Hong Kong 1,202,000 853,142
------------
30,511,281
------------
FOOD & HOUSEHOLD PRODUCTS 1.0%
Northern Foods PLC................................................ United Kingdom 2,245,907 9,700,984
------------
FOREST PRODUCTS & PAPER 4.2%
Asia Pulp & Paper Co. Ltd., ADR................................... Indonesia 369,600 3,719,100
Assidomaen AB..................................................... Sweden 135,100 3,420,081
Cartiere Burgo SpA................................................ Italy 571,600 3,407,951
Enso OY, R........................................................ Finland 400,000 3,105,043
Fletcher Challenge Ltd. Forestry Division......................... New Zealand 6,166,000 5,119,805
Metsa Serla OY, B................................................. Finland 402,250 3,137,272
Munksjo AB........................................................ Sweden 70,000 665,626
Norske Skogindustrier AS, A....................................... Norway 176,400 5,118,590
Sappi Ltd......................................................... South Africa 422,354 2,126,307
Stora Kopparbergs Bergslags AB, B................................. Sweden 300,000 3,721,709
UPM-Kymmene Corp.................................................. Finland 351,000 7,085,444
------------
40,626,928
------------
HEALTH & PERSONAL CARE 3.3%
Astra AB, A....................................................... Sweden 80,000 1,385,408
Astra AB, B....................................................... Sweden 138,667 2,331,521
Medeva PLC........................................................ United Kingdom 3,190,000 8,461,191
Novartis AG....................................................... Switzerland 4,266 6,917,128
*Nycomed Amersham PLC, A, fgn..................................... United Kingdom 43,395 1,641,655
*Nycomed Amersham PLC, B, fgn..................................... United Kingdom 172,409 6,265,168
Pharmacia & Upjohn................................................ United States 119,800 4,387,675
------------
31,389,746
------------
INDUSTRIAL COMPONENTS 1.9%
BTR PLC........................................................... United Kingdom 3,045,000 9,326,838
Madeco Manufacturera de Cobre SA, ADR............................. Chile 190,000 2,897,500
SKF AB, B......................................................... Sweden 193,900 4,127,143
Yamato Kogyo Co. Ltd.............................................. Japan 280,000 1,683,388
------------
18,034,869
------------
INSURANCE 9.1%
Baloise-Holding................................................... Switzerland 3,200 5,917,696
GIO Australia Holdings Ltd........................................ Australia 3,280,000 8,386,358
ING Groep NV...................................................... Netherlands 113,736 4,790,301
Istituto Nazionale Delle Assicurazioni SpA........................ Italy 5,350,000 10,851,215
Partnerre Ltd..................................................... Bermuda 269,000 12,474,875
SCOR SA........................................................... France 250,000 11,954,806
Skandia Foersaekrings AB.......................................... Sweden 318,300 15,013,205
Zuerich Versicherung, new......................................... Switzerland 37,000 17,618,445
------------
87,006,901
------------
</TABLE>
TI-9
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING 3.3%
*Cifra SA de CV................................................... Mexico 2,470,000 $ 6,090,453
Dairy Farm International Holdings Ltd............................. Hong Kong 839,000 906,120
David Jones Ltd................................................... Australia 2,225,500 2,509,314
Koninklijke Bijenkorf Beheer NV................................... Netherlands 80,300 5,029,517
Safeway PLC....................................................... United Kingdom 1,200,000 6,799,369
Storehouse PLC.................................................... United Kingdom 2,528,240 9,861,664
------------
31,196,437
------------
METALS & MINING 4.6%
*Angang New Steel Company Ltd., H, 144A........................... China 22,414,000 3,326,378
Anglo American Platinum Corp. Ltd................................. South Africa 518,809 6,929,536
Boehler Uddeholm AG............................................... Austria 27,210 1,595,140
Boehler Uddeholm AG, 144A......................................... Austria 33,800 1,981,467
British Steel PLC................................................. United Kingdom 3,200,000 6,924,189
*+Chongqing Iron & Steel Ltd., H.................................. China 25,564,000 3,496,947
Companhia Siderurgica Nacional Sid Nacional....................... Brazil 12,700,000 352,762
Pechiney SA, A.................................................... France 136,212 5,377,415
Pohang Iron & Steel Co. Ltd....................................... South Korea 85,000 2,299,263
Usinas Siderugicas de Minas Gerais, Sponsored ADR................. Brazil 970,000 5,335,000
Vale do Rio Doce, ADR............................................. Brazil 335,000 6,738,721
------------
44,356,818
------------
MULTI-INDUSTRY 3.8%
Alfa SA de CV, A.................................................. Mexico 1,400,000 9,488,879
Broken Hill Proprietary Co. Ltd................................... Australia 1,017,543 9,450,371
Harrisons & Crosfield PLC......................................... United Kingdom 3,420,553 7,864,890
Hutchison Whampoa Ltd............................................. Hong Kong 600,000 3,763,066
Jardine Matheson Holdings Ltd..................................... Hong Kong 573,468 2,924,687
Jardine Strategic Holdings Ltd.................................... Hong Kong 225,000 594,000
Swire Pacific Ltd., A............................................. Hong Kong 400,000 2,193,831
------------
36,279,724
------------
REAL ESTATE 1.2%
Cheung Kong Holdings Ltd.......................................... Hong Kong 850,000 5,566,847
New Asia Realty and Trust Co. Ltd., A............................. Hong Kong 2,314,000 5,673,764
------------
11,240,611
------------
RECREATION & OTHER CONSUMER GOODS 0.1%
SMH AG, br........................................................ Switzerland 1,800 992,577
------------
TELECOMMUNICATIONS 9.7%
British Telecommunications PLC.................................... United Kingdom 980,000 7,721,636
Hong Kong Telecommunications Ltd.................................. Hong Kong 2,261,786 4,655,502
Koninklijke PTT Nederland NV...................................... Netherlands 263,235 10,983,001
Nokia AB, A....................................................... Finland 122,600 8,572,011
PT Indosat TBK, ADR............................................... Indonesia 49,000 946,312
Tele Danmark AS, B................................................ Denmark 123,750 7,675,791
Telecom Italia SpA, di Risp....................................... Italy 3,769,750 16,564,311
Telefonica de Argentina SA, B, ADR................................ Argentina 299,800 11,167,550
Telefonica de Espana SA, ADR...................................... Spain 70,000 6,374,375
Telefonica del Peru SA, B, ADR.................................... Peru 29,000 676,062
Telefonica del Peru SA, B......................................... Peru 3,000,000 6,704,587
Telefonos de Mexico SA, L, ADR.................................... Mexico 191,300 10,724,756
------------
92,765,894
------------
TRANSPORTATION 1.4%
Hitachi Zosen Corp................................................ Japan 3,001,000 4,803,623
Koninklijke Nedlloyd NV........................................... Netherlands 216,300 4,907,060
Qantas Airways Ltd., ADR, 144A.................................... Australia 231,900 4,093,035
------------
13,803,718
------------
</TABLE>
TI-10
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 8.1%
British Gas PLC................................................... United Kingdom 2,395,588 $ 10,780,303
*Centrica PLC..................................................... United Kingdom 1,870,000 2,702,667
*CEZ AS........................................................... Czech Republic 19,000 623,518
Cia Sevillana de Electricidad SA.................................. Spain 323,029 3,021,440
Endesa SA, ADR.................................................... Spain 240,000 4,365,000
Energie-Versorgung Niederoesterreich AG........................... Austria 48,600 6,386,890
Hong Kong Electric Holdings Ltd................................... Hong Kong 2,431,000 9,238,992
Iberdrola SA...................................................... Spain 626,500 8,245,044
Korea Electric Power Corp......................................... South Korea 269,000 2,483,687
National Grid Holdings PLC........................................ United Kingdom 1,122,100 5,348,994
National Power PLC................................................ United Kingdom 516,000 5,105,932
Shandong Huaneng Power Development Co. Ltd., ADR.................. China 100,000 687,500
Thames Water Group PLC............................................ United Kingdom 815,315 12,198,659
VEBA AG........................................................... Germany 98,000 6,673,152
------------
77,861,778
------------
WHOLESALE & INTERNATIONAL TRADE 0.6%
Brierley Investments Ltd.......................................... New Zealand 8,410,000 6,006,410
------------
TOTAL COMMON STOCKS
(COST $645,328,626)........................................... 790,093,134
------------
PREFERRED STOCKS 5.2%
*Banco Bradesco SA, pfd........................................... Brazil 860,000,000 8,476,323
*Bank Austria AG, new, pfd., 144A................................. Austria 460,000 20,757,630
News Corp. Ltd., pfd., ADR........................................ Australia 221,100 4,394,363
*Lojas Americanas SA, pfd......................................... Brazil 312,058,451 1,453,971
Telecomunicacoes Brasileiras SA, pfd.............................. Brazil 4,866,533 555,091
Telecomunicacoes Brasileiras SA, pfd., ADR........................ Brazil 116,100 13,518,394
------------
TOTAL PREFERRED STOCKS
(COST $36,439,803)............................................ 49,155,772
------------
PRINCIPAL
AMOUNT**
----------
SHORT TERM INVESTMENTS 7.5%
Federal Farm Credit Banks, 5.50% to 5.55%,
with maturities to 3/02/98....................................... United States $16,990,000 16,987,985
Federal National Mortgage Association, 5.70%,
with maturities to 1/21/98....................................... United States 50,000,000 49,905,825
U.S. Treasury Bills, 4.50% to 4.91%,
with maturities to 1/22/98....................................... United States 4,593,000 4,580,733
------------
TOTAL SHORT TERM INVESTMENTS
(COST $71,459,830)............................................ 71,474,543
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT
(COST $753,228,259)........................................... 910,723,449
------------
(A)REPURCHASE AGREEMENT 3.3%
UBS Securities Inc., 6.45%, 1/02/98,
(Market Value $31,510,287) (COST $31,499,000)
Collateral: U.S. Treasury Note................................... United States 31,499,000 31,499,000
------------
TOTAL INVESTMENTS
(COST $784,727,259) 98.6%.................................... 942,222,449
OTHER ASSETS, LESS LIABILITIES 1.4%.......................... 13,794,406
------------
TOTAL NET ASSETS 100.0%....................................... $956,016,855
============
</TABLE>
*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS.
(a)AT DECEMBER 31, 1997, ALL REPURCHASE AGREEMENTS HELD BY THE FUND HAD BEEN
ENTERED INTO ON THAT DATE.
+THE INVESTMENT COMPANY ACT OF 1940 DEFINES "AFFILIATED COMPANIES" AS
INVESTMENTS IN PORTFOLIO COMPANIES IN WHICH THE FUND OWNS 5% OR MORE OF THE
OUTSTANDING VOTING SECURITIES. INVESTMENTS IN NON-CONTROLLED AFFILIATED
COMPANIES AT DECEMBER 31, 1997, WERE $3,496,947.
See Notes to Financial Statements.
TI-11
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(cost $753,228,259) $ 910,723,449
Repurchase agreement, at value and
cost 31,499,000
Cash 11,791
Receivables:
Investment securities sold 9,040,601
Fund shares sold 3,235,405
Dividends and interest 2,669,434
------------
Total assets 957,179,680
------------
Liabilities:
Payables:
Investment securities purchased 151,411
Fund shares redeemed 6,263
To affiliates 636,405
Other liabilities 368,746
------------
Total liabilities 1,162,825
------------
Net assets, at value $ 956,016,855
============
Net assets consist of:
Undistributed net investment income $ 22,712,773
Net unrealized appreciation 157,495,190
Accumulated net realized gain 41,363,383
Beneficial shares 734,445,509
------------
Net assets, at value $ 956,016,855
============
Class 1:
Net asset value per share
($938,410,418 / 46,501,531 shares
outstanding) $ 20.18
============
Class 2:
Net asset value per share
($17,606,437 / 874,330
shares outstanding) $ 20.14
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of
$2,777,787)
Dividends $25,886,917
Interest 3,997,366
-----------
Total investment income $ 29,884,283
Expenses:
Management fees (Note 3) 5,356,048
Administrative fees (Note 3) 838,726
Distribution fees (Note 3)
Class 2 13,723
Custodian fees 319,710
Reports to shareholders 338,300
Professional fees (Note 3) 51,131
Trustees' fees and expenses 26,700
Other 1,910
-----------
Total expenses 6,946,248
------------
Net investment income 22,938,035
------------
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments 45,242,195
Foreign currency transactions (468,336)
-----------
Net realized gain 44,773,859
Net unrealized
appreciation on
investments 33,944,248
------------
Net realized and unrealized
gain 78,718,107
------------
Net increase in net assets
resulting from operations $ 101,656,142
============
</TABLE>
See Notes to Financial Statements.
TI-12
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................................ $ 22,938,035 $ 16,824,712
Net realized gain from investments and foreign currency transactions............. 44,773,859 7,597,723
Net unrealized appreciation on investments....................................... 33,944,248 91,776,417
-----------------------------
Net increase in net assets resulting from operations........................... 101,656,142 116,198,852
-----------------------------
Distributions to shareholders from:
Net investment income
Class 1......................................................................... (19,635,324) (6,297,332)
Net realized gains
Class 1......................................................................... (7,892,630) (1,836,722)
Fund share transactions (Note 2):
Class 1.......................................................................... 180,999,255 221,778,404
Class 2.......................................................................... 17,905,036 --
-----------------------------
Net increase in net assets..................................................... 273,032,479 329,843,202
-----------------------------
Net assets:
Beginning of year................................................................. 682,984,376 353,141,174
-----------------------------
End of year....................................................................... $956,016,855 $682,984,376
=============================
Undistributed net investment income included in net assets:
End of year....................................................................... $ 22,712,773 $ 16,391,933
=============================
</TABLE>
See Notes to Financial Statements.
TI-13
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton International Fund (the Fund) is a separate, diversified series of
Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital growth through a flexible policy of investing in stock
and debt obligations of companies and governments outside the United States. The
following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the funds comprising
the Trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
TI-14
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. BENEFICIAL SHARES
The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................... 13,166,780 $ 258,892,155 15,869,480 $256,826,546
Shares issued on reinvestment of distributions................ 1,502,617 27,527,954 524,440 8,134,054
Shares redeemed............................................... (5,280,097) (105,420,854) (2,621,355) (43,182,196)
------------------------------------------------------------------
Net increase.................................................. 9,389,300 $ 180,999,255 13,772,565 $221,778,404
==================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997*
-----------------------------
SHARES AMOUNT
-----------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold.................................................. 1,240,830 $ 25,401,552
Shares redeemed.............................................. (366,500) (7,496,516)
-----------------------------
Net increase................................................. 874,330 $ 17,905,036
=============================
</TABLE>
*Effective date of Class 2 shares was May 1, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton
Investment Councel, Inc. (TICI), Templeton Funds Annuity Company (TFAC) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.
Effective May 1, 1997, the Fund pays an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>
TI-15
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)
Prior to May 1, 1997, the Fund paid an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
The Fund pays its allocated share of an administrative fee to TFAC based on the
Trust's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.
Included in professional fees are legal fees of $4,207 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................................................... $221,752,024
Unrealized depreciation..................................................................... (64,256,834)
------------
Net unrealized appreciation................................................................. $157,495,190
============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $281,017,079 and $127,326,874, respectively.
TI-16
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Templeton International Fund, series of
Templeton Variable Products Series Fund (the Trust) as of December 31, 1997, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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 the
Templeton International Fund, series of Templeton Variable Products Series Fund
as of December 31, 1997, the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998
TI-17
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
0.66% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
TI-18
<PAGE>
TEMPLETON DEVELOPING MARKETS FUND
- --------------------------------------------------------------------------------
Investment Objective: Templeton Developing Markets Fund seeks long-term capital
appreciation. The Fund seeks to achieve this objective by investing primarily in
equity securities of issuers in countries having developing markets.
- --------------------------------------------------------------------------------
During the first half of the year, large capital inflows from developed market
countries contributed to rising prices of many emerging market equities.
However, since June, a currency crisis affecting several emerging market
countries caused these prices to fall sharply.
The crisis first became apparent when the Thai government devalued the baht in
July 1997. Between then and the end of the year, the value of the Thai baht
declined 47%, the Indonesian rupiah 55%, the Malaysian ringgit plunged 34%, the
Philippine peso dropped 33%, and the Singapore dollar fell 14% versus the U.S.
dollar.(1) These devaluations thrust many companies into bankruptcy, adversely
affecting the banking systems in these countries. Stock markets in the region
also suffered, as a rush for cash drove down equity prices in a wild melee of
selling, the likes of which had not been seen for many years. As of December 31,
1997, the Thai market was down 56% in local currency terms from its yearly high
reached on January 22, 1997. Enormous falls from 1997 highs were also seen in
South Korea (-53% since June 17), Malaysia (-53% since February 25) and a number
of other countries.(1)
1. Source: Bloomberg.
TEMPLETON DEVELOPING
MARKETS FUND
Change in Value of Various
Currencies vs. U.S. Dollar
12/31/96 - 12/31/97
% OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
Indonesian rupiah -56.3%
South Korean won -47.4%
Thai baht -45.4%
Malaysian ringgit -34.8%
Philippine peso -33.4%
Singapore dollar -16.6%
Hong Kong dollar -0.2%
Source: Bloomberg.
TD-1
<PAGE>
During the latter half of the reporting period, the Asian currency crisis
created some exceptional opportunities in certain stocks we previously had
considered over-valued. Seeking to take advantage of these opportunities, we
sold shares in Latin America and Eastern Europe, and bought others in Asia,
where prices had declined the most.
As of December 31, 1997, the Fund owned investments in 31 countries. Our largest
regional holdings were Asia, followed by Latin America, Europe, and the Middle
East/Africa.
Looking forward, we believe that, having swallowed the bitter medicine of
currency devaluation, many Asian countries are well-placed for an export-led
recovery, despite higher costs for imported raw materials. This may be
particularly true of Indonesia, Malaysia and Thailand. Using a theory known as
Purchasing Power Parity (PPP), which calculates the degree to which a given
currency may be either under- or over-valued versus the U.S. dollar, it appears
to us that the rupiah, ringgit, and baht have become seriously undervalued and
may actually begin appreciating if exports begin to grow strongly. Such
developments could help stock prices in all these countries to rise from
depressed year-end levels, especially in Thailand, where we are finding what we
consider to be some of the best bargains in emerging markets since the Mexican
peso crisis of 1994-95.
The situation is somewhat different in the Philippines and Singapore, where
local currencies are not yet undervalued according to PPP theory. International
investors may continue selling the Philipine peso and Singapore dollar, which
could negatively impact these economies.
TEMPLETON DEVELOPING
MARKETS FUND
Geographic Distribution
Based on Total Net Assets
12/31/97
Asia 37.5%
Latin America 16.3%
Europe 12.6%
Middle East/Africa 8.7%
Short-Term Investments &
Other Net Assets 24.9%
TEMPLETON DEVELOPING
MARKETS FUND
Total Return of Local Stock Index,
Measured in U.S. Dollars
12/31/96 - 12/31/97
% OF TOTAL
COUNTRY, NET ASSETS
----------------------------------------------------
Thailand -74.7%
Indonesia -70.5%
South Korea -69.2%
Malaysia -67.9%
Singapore -41.1%
Hong Kong -17.7%
Source: Bloomberg.
TD-2
<PAGE>
In Hong Kong, where authorities were able to defend its dollar's peg to the U.S.
dollar throughout 1997 by sharply increasing overnight interbank interest rates,
the government faces a dilemma. If it maintains its fixed-rate exchange currency
policy versus the U.S. dollar, it risks further attacks in the foreign exchange
market and continued upward pressure on interest rates. This could damage the
property sector and the outlook for Hong Kong banks. On the other hand, by
floating the currency, the government risks inflation. A difficult choice, but
given the underlying health of the economy, we believe Hong Kong's government
has made the right decision in continuing to peg its dollar's peg to the U.S.
dollar, at least for the moment. In the long run, however, we think the Hong
Kong dollar may have to be devalued unless inflation there can be lowered below
the U.S. inflation rate.
The current emerging market crisis represents an opportunity to discover
undervalued securities that were previously overvalued. Consequently, we firmly
believe that now is the time to maintain our rational investing approach and
pick up bargains which can underpin strong performance for the Fund over the
next few years.
Please remember that this discussion accurately reflects our views and opinions
as of December 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly, which may affect our strategies and
portfolio holdings. Although historic performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
2. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended December 31, 1997.
TEMPLETON DEVELOPING
MARKETS FUND
Top 10 Holdings on 12/31/97
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
---------------------------------------------------------
Cemex SA, B
Building Materials &
Components, Mexico 2.7%
Investimentos Itau SA, pfd.
Multi-Industry, Brazil 1.8%
Aracruz Celulose SA, ADR
Forest Products & Paper,
Brazil 1.6%
HSBC Holdings PLC
Banking, Hong Kong 1.5%
Swire Pacific Ltd., A & B
Multi-Industry, Hong Kong 1.4%
CEZ AS
Utilities Electrical & Gas,
Czech Republic 1.4%
Przedsiebiorstwo Handlu
Zagranicznego
Universal SA
Wholesale & International
Trade, Poland 1.3%
Banco Bradesco SA
Banking, Brazil 1.3%
Hang Lung
Development Co. Ltd.
Real Estate, Hong Kong 1.1%
Telefonica del Peru SA,
B, ADR
Telecommunications, Peru 1.1%
For a complete list of portfolio holdings, please see the
Fund's Statement of Investments.
TD-3
<PAGE>
It is important to remember that the portfolio is subject to special and higher
risks related to foreign developing markets, including changes in currency
values, market price swings, and economic, social, and political developments in
the countries where the portfolios are invested and their relatively small size
and lesser liquidity. 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. Hong
Kong's equity market has increased 1268% in the last 15 years, but has suffered
five quarterly declines of more than 20% during that time.(2)
We thank you for investing in the Templeton Developing Markets Fund, and welcome
any comments or suggestions you may have.
Sincerely,
/s/ J. Mark Mobius
Dr. J. Mark Mobius
Portfolio Manager
Templeton Developing Markets Fund
TEMPLETON DEVELOPING
MARKETS FUND
Top 10 Countries
Represented in the Fund
12/31/97
% OF TOTAL
COUNTRY, NET ASSETS
---------------------------------------------------------
Hong Kong 7.2%
Mexico 6.9%
Brazil 6.4%
Thailand 6.3%
South Africa 6.2%
Poland 4.3%
Singapore 3.9%
Turkey 3.8%
Russia 3.4%
India 3.2%
TD-4
<PAGE>
PERFORMANCE SUMMARY
CLASS 2
Templeton Developing Markets Fund - Class 2 delivered a -29.33% total return for
the 12-month period ended December 31, 1997. Total return of Class 2 shares
represents the cumulative or average annual change in value, assuming
reinvestment of dividends and capital gains. For periods of less than one year,
aggregate annual figures are shown. Past expense reductions by the manager
increased returns.
The graph on the following page compares the performance of the Fund - Class 2
shares since inception with that of the broadbased Morgan Stanley Capital
International (MSCI) World Index. This index includes approximately 1,500
companies representing the stock markets of 23 countries, including the U.S.,
Canada, United Kingdom and Japan. 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, 1997, the index's U.S. weighting was 49.4%.
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 approximately 1,400
stocks that foreigners can buy in 32 countries, including Mexico, South Korea,
Brazil, Jordan and Turkey. The Consumer Price Index (CPI) is a commonly used
measure of inflation. Please remember that the Fund's performance differs from
that of an index because an index is not managed, does not contain cash (the
Fund generally carries a certain percentage of cash at any given time), and
includes no sales charges or management expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
NOTE: PERFORMANCE REFLECTS THE FUND - CLASS 2'S OPERATING EXPENSES, BUT DOES NOT
INCLUDE ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE
CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. THESE CHARGES AND DEDUCTIONS, PARTICULARLY FOR
VARIABLE LIFE POLICIES, CAN HAVE A SIGNIFICANT EFFECT ON CONTRACT VALUES AND
INSURANCE BENEFITS. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS PROVIDED BY
THE INSURANCE COMPANY.
TD- 5
<PAGE>
<TABLE>
<CAPTION>
- NOTE: First period return inception date is 03/01/96
Monthly US Dollar US Dollar
Templeton Variable Products Developing Markets Fund IFC Investable Comp
Acct 8381 MSCI World Consumer Price IFC Investable
Index Index Composite Index
<S> <C> <C> <C> <C>
INCEPT 10,000 $10,000 $10,000 $10,000
Mar-96 10,020 $10,169 $10,052 $10,144
Apr-96 9,980 $10,409 $10,091 $10,550
May-96 10,010 $10,420 $10,110 $10,461
Jun-96 9,800 $10,475 $10,116 $10,584
Jul-96 9,250 $10,107 $10,136 $9,889
Aug-96 9,250 $10,225 $10,155 $10,195
Sep-96 9,370 $10,627 $10,187 $10,346
Oct-96 9,140 $10,703 $10,219 $10,123
Nov-96 9,460 $11,305 $10,239 $10,273
Dec-96 9,430 $11,126 $10,239 $10,318
Jan-97 10,110 $11,261 $10,271 $11,047
Feb-97 10,349 $11,393 $10,302 $11,587
Mar-97 10,138 $11,170 $10,327 $11,302
Apr-97 9,896 $11,537 $10,340 $11,109
May-97 9,816 $12,251 $10,334 $11,487
Jun-97 9,977 $12,864 $10,346 $11,983
Jul-97 10,369 $13,458 $10,358 $12,104
Aug-97 9,363 $12,560 $10,378 $10,558
Sep-97 9,604 $13,244 $10,404 $10,903
Oct-97 7,863 $12,549 $10,430 $9,110
Nov-97 7,067 $12,773 $10,424 $8,674
Dec-97 6,665 $12,931 $10,411 $8,786
</TABLE>
* Index includes reinvested dividends.
** Source: U.S. Bureau of Labor Statistics, December 31, 1997.
TEMPLETON DEVELOPING MARKETS FUND - CLASS 2
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE SINCE CLASS 2
INCEPTION INCEPTION
1-YEAR* (3/4/96)* (5/1/97)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual Total Return -29.33% -19.85% --
Cumulative Total Return -29.33% -33.35% --
Value of $10,000 Investment $7,067 $6,665 $6,721
Aggregate Total Return -- -- -32.79%
</TABLE>
*Because Class 2 shares were not offered until May 1, 1997, performance shown
for periods prior to that date represents the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%.
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to their smaller size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance cannot predict or guarantee future results.
TD- 6
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996+
-----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 1
(For a share outstanding throughout the year)
Net asset value, beginning of year.................................................................. $9.43 $10.00
-----------------------
Income from investment operations:
Net investment income.............................................................................. .09 .05
Net realized and unrealized loss................................................................... (2.82) (.62)
-----------------------
Total from investment operations.................................................................... (2.73) (.57)
-----------------------
Less distributions from:
Net investment income.............................................................................. (.04) --
Net realized gains................................................................................. (.03) --
-----------------------
Total distributions................................................................................. (.07) --
-----------------------
Net asset value, end of year........................................................................ $6.63 $9.43
=======================
Total Return*....................................................................................... (29.22)% (5.70)%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)..................................................................... $163,459 $72,245
Ratios to average net assets:
Expenses........................................................................................... 1.58% 1.70%**
Expenses, excluding waiver and payments by affiliate............................................... 1.58% 1.78%**
Net investment income.............................................................................. 1.63% 1.52%**
Portfolio turnover rate............................................................................. 23.82% 9.95%
Average commission rate paid***..................................................................... $.0018 $.0020
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
***RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
+FOR THE PERIOD MARCH 4, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996.
TD-7
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
1997+
---------
<S> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 2
(For a share outstanding throughout the year)
Net asset value, beginning of year............................................................................. $9.85
---------
Income from investment operations:
Net investment income......................................................................................... .04
Net realized and unrealized loss.............................................................................. (3.27)
---------
Total from investment operations............................................................................... (3.23)
---------
Net asset value, end of year................................................................................... $6.62
=========
Total Return*.................................................................................................. (32.79)%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)................................................................................ $9,569
Ratios to average net assets:
Expenses...................................................................................................... 1.77%**
Net investment income......................................................................................... 1.48%**
Portfolio turnover rate........................................................................................ 23.82%
Average commission rate paid***................................................................................ $.0018
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
***RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TD-8
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES 75.1%
ARGENTINA 1.9%
Atanor Cia Nacional Para la Industria Quimica SA, D...... Chemicals 161,169 $ 222,455
*Buenos Aires Embotelladora SA, ADR...................... Beverages & Tobacco 29,000 290
Capex SA, A.............................................. Utilities Electrical & Gas 25,000 166,282
Central Costanera SA, B.................................. Utilities Electrical & Gas 12,120 31,518
Molinos Rio de Plata SA, B............................... Food & Household Products 62,205 149,320
Nobleza Piccardo Sdad Industrial Comercial y Financial... Beverages & Tobacco 42,851 192,866
Quilmes Industrial SA.................................... Beverages & Tobacco 119,000 1,628,812
Siderar, A............................................... Metals & Mining 5,595 23,783
Sociedad Comercial del Plata Cadelplata Come............. Multi-Industry 32,950 52,071
Transportadora de Gas del Sur SA, B...................... Energy Sources 11,156 25,329
Transportadora de Gas del Sur SA, B, ADR................. Energy Sources 2,000 22,375
YPF Sociedad Anonima, ADR................................ Energy Sources 21,547 736,638
-----------
3,251,739
-----------
BOTSWANA 0.4%
Sechaba Brewery Holding Ltd.............................. Beverages & Tobacco 404,000 426,932
Sefalana Holding Co. Ltd................................. Food & Household Products 31,100 57,157
Standard Chartered Bank Botswana Ltd..................... Banking 68,000 258,874
-----------
742,963
-----------
BRAZIL 6.4%
Aracruz Celulose SA, ADR................................. Forest Products & Paper 196,800 2,829,000
Banco Bradesco SA........................................ Banking 97,596,000 970,669
Banco Bradesco SA, pfd................................... Banking 130,405,000 1,285,296
*Banco Bradesco SA, rts.................................. Banking 4,172,733 15,329
*Banco Bradesco SA, pfd. rts............................. Banking 5,575,488 19,983
Banco do Brasil SA....................................... Banking 41,610,000 268,440
Banco do Brazil SA, pfd.................................. Banking 16,653,000 123,101
Brasmotor SA, pfd........................................ Multi-Industry 1,680,000 165,584
Companhia Siderurgica Nacional Sid Nacional.............. Metals & Mining 62,850,000 1,745,755
Copene-Petroquimica do Nordeste SA, A, pfd............... Chemicals 344,000 104,798
Duratex SA, pfd.......................................... Forest Products & Paper 3,715,000 146,463
Investimentos Itau SA, pfd............................... Multi-Industry 3,985,000 3,106,447
*Mannesmann SA........................................... Machinery & Engineering 2,837,000 333,002
-----------
11,113,867
-----------
CHINA 0.7%
China Southern Glass Co. Ltd., B......................... Building Materials & Components 315,844 88,855
*China Textile Machinery Co. Ltd., B..................... Machinery & Engineering 305,100 25,018
Chiwan Wharf Holdings Ltd., B............................ Transportation 174,000 54,789
Guangshen Railway Co. Ltd., ADR.......................... Transportation 5,000 67,187
*Luoyang Glass Co. Ltd., H............................... Misc Materials & Commodities 1,328,000 119,964
Maanshan Iron & Steel Co. Ltd., H........................ Metals & Mining 135,000 14,983
Northeast Electric Transmission & Transformation, H...... Machinery & Engineering 516,000 58,599
*Phoenix Co. Ltd......................................... Recreation & Other Consumer Goods 540,010 54,001
Shandong Huaneng Power Development Co. Ltd., ADR......... Utilities Electrical & Gas 17,500 120,313
*Shanghai Jin Jiang Tower Co. Ltd., B.................... Leisure & Tourism 282,240 52,497
Shanghai New Asia Group Co. Ltd., B...................... Food & Household Products 61,540 16,616
Shanghai Petrochemical Co. Ltd., H....................... Chemicals 1,250,000 195,186
*Shanghai Shangling Electric Appliance, B................ Appliances & Household Durables 355,730 73,280
*Shanghai Steel Tube Co. Ltd., B......................... Machinery & Engineering 400,000 34,400
Shanghai Tyre & Rubber Co. Ltd., B....................... Industrial Components 496,000 124,000
*Shanghai Vacuum Electron Devices Co. Ltd., B............ Appliances & Household Durables 400,000 60,000
Shanghai Yaohua Pilkington Glass, B...................... Building Materials & Components 142,000 19,596
*Shanghai Zhenhua Port Machinery Co. Ltd., B............. Machinery & Engineering 50,000 34,400
*Shenzhen China Bicycles Co. Ltd., B..................... Recreation & Other Consumer Goods 700 115
Shenzhen Huafa Electronics Co. Ltd., B................... Appliances & Household Durables 58,400 14,018
-----------
1,227,817
-----------
</TABLE>
TD-9
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
CZECH REPUBLIC 1.8%
*CEZ AS.................................................. Utilities Electrical & Gas 74,500 $ 2,444,848
Komercni Banka AS........................................ Banking 7,000 264,124
Komercni Banka AS, GDR................................... Banking 8,000 98,000
*Leciva AS............................................... Health & Personal Care 700 42,503
*SPT Telecom AS.......................................... Telecommunications 2,610 279,217
*Unipetrol, fgn.......................................... Chemicals 15,862 45,624
-----------
3,174,316
-----------
GHANA 0.8%
Ashanti Goldfields Co. Ltd., GDR......................... Metals & Mining 173,200 1,299,000
-----------
GREECE 0.7%
Delta Dairy SA........................................... Food & Household Products 26,790 303,906
Ergo Bank SA............................................. Banking 2,323 120,140
Hellas Can SA Packaging Manufacturers.................... Metals & Mining 14,000 202,219
Hellenic Telecommunications Organizations................ Telecommunications 16,236 332,899
Hellenic Telecommunications Organizations, 144A.......... Telecommunications 12,500 256,297
*National Bank of Greece SA.............................. Banking 200 17,611
-----------
1,233,072
-----------
HONG KONG 7.2%
Cheung Kong Holdings Ltd................................. Real Estate 249,000 1,630,759
Cross Harbour Tunnel Co. Ltd............................. Transportation 58,000 98,800
Dairy Farm International Holdings Ltd.................... Merchandising 188,104 203,152
Golden Resources Development International Ltd........... Food & Household Products 2,428,000 250,665
Goldlion Holdings Ltd.................................... Textiles & Apparel 82,000 27,249
Hang Lung Development Co. Ltd............................ Real Estate 1,376,000 1,935,527
Hong Kong & Shanghai Hotels Ltd.......................... Leisure & Tourism 1,211,000 1,000,181
Hong Kong Electric Holdings Ltd.......................... Utilities Electrical & Gas 138,400 525,988
Hopewell Holdings Ltd.................................... Construction & Housing 396,000 98,629
HSBC Holdings PLC........................................ Banking 105,600 2,602,865
IMC Holdings Ltd......................................... Transportation 415,000 107,111
Jardine Matheson Holdings Ltd............................ Multi-Industry 8,651 44,120
Joyce Boutique Holdings Ltd.............................. Merchandising 1,080,000 45,993
*Lai Fung Holdings Ltd................................... Real Estate 28,880 9,970
Lai Sun Development Co. Ltd.............................. Real Estate 1,444,000 475,184
Lai Sun Garment International Ltd........................ Multi-Industry 458,000 285,179
Laws International Holdings Ltd.......................... Textiles & Apparel 686,000 94,724
Semi-Tech Co. Ltd........................................ Appliances & Household Durables 247,834 40,618
*Semi-Tech Co. Ltd., wts................................. Appliances & Household Durables 5,706 206
Swire Pacific Ltd., A.................................... Multi-Industry 247,000 1,354,691
Swire Pacific Ltd., B.................................... Multi-Industry 1,102,500 1,116,870
Tingyi (Cayman Islands) Holding Corp..................... Food & Household Products 634,000 82,635
Wheelock and Company Ltd................................. Multi-Industry 178,000 207,885
*Wo Kee Hong Holdings Ltd................................ Merchandising 2,902,000 161,035
-----------
12,400,036
-----------
HUNGARY 0.8%
Borsodchem RT............................................ Chemicals 2,089 75,277
Borsodchem RT, GDR, 144A................................. Chemicals 11,000 396,550
*Fotex First Hungarian American Photo Service Co......... Multi-Industry 45,385 51,108
Inter-Europa Bank RT..................................... Banking 600 55,228
Tiszai Vegyi Kombinat RT................................. Chemicals 23,564 395,723
Tiszai Vegyi Kombinat RT, GDR, 144A...................... Chemicals 21,000 359,100
Tiszai Vegyi Kombinat RT, GDR, Reg S..................... Chemicals 8,000 136,800
-----------
1,469,786
-----------
INDIA 3.2%
*Andhra Valley Power Supply Co. Ltd...................... Utilities Electrical & Gas 33,550 68,255
Arvind Mills Ltd......................................... Textiles & Apparel 119,500 269,027
*Bajaj Auto Ltd.......................................... Automobiles 4,950 76,397
</TABLE>
TD-10
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
---------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
INDIA (CONT.)
Bombay Dyeing & Manufacturing Co. Ltd...................... Chemicals 288,200 $ 729,690
Cochin Refineries Ltd...................................... Energy Sources 28,900 125,332
Grasim Industries Ltd...................................... Multi-Industry 25,000 222,577
Great Eastern Shipping Co. Ltd............................. Transportation 117,000 137,296
Gujarat Ambuja Cements Ltd................................. Building Materials & Components 13,600 95,755
Gujarat Industries Power Ltd............................... Energy Equipment & Services 20,000 13,393
Gujarat Narmanda Valley Fertilizers Co. Ltd., ADR.......... Chemicals 9,000 13,500
*Hindustan Organic Chemicals Ltd........................... Chemicals 20,400 7,494
India Cements Ltd.......................................... Building Materials & Components 15,300 26,151
India Cements Ltd., GDR.................................... Building Materials & Components 109,590 208,221
Indian Aluminium Co. Ltd................................... Metals & Mining 31,500 59,263
Indian Petrochemicals Corp. Ltd............................ Chemicals 151,000 272,532
Indian Rayon & Industries Ltd.............................. Multi-Industry 1,125 5,316
Indian Rayon & Industries Ltd., GDR........................ Multi-Industry 28,670 121,845
Indo Gulf Fertilisers & Chemicals Corp. Ltd................ Chemicals 1,800 1,687
Indo Gulf Fertilisers & Chemicals Corp. Ltd., GDR.......... Chemicals 7,150 6,363
Industrial Credit & Inv. Corp. of India.................... Financial Services 246,500 481,052
Industrial Development Bank of India....................... Banking 77,800 183,584
Larsen and Toubro Ltd...................................... Multi-Industry 53,600 277,230
Madras Cements Ltd......................................... Building Materials & Components 100 11,671
*Mahanagar Telephone Nigam Ltd............................. Telecommunications 34,300 225,750
National Aluminium Co. Ltd................................. Metals & Mining 279,800 210,564
Oriental Bank of Commerce.................................. Banking 179,100 293,550
Steel Authority of India Ltd............................... Metals & Mining 63,800 15,869
Sterlite Industries Ltd.................................... Metals & Mining 62,450 316,233
Tamil Nadu Newsprint & Papers Ltd.......................... Forest Products & Paper 5,400 3,168
Tata Chemicals Ltd......................................... Chemicals 76,800 291,918
Tata Engineering & Locomotive Co........................... Machinery & Engineering 76,400 577,385
Tata Hydro-Electric Power Co............................... Utilities Electrical & Gas 51,700 98,586
Tata Iron & Steel Co. Ltd.................................. Metals & Mining 6,800 23,288
Thermax Ltd................................................ Energy Equipment & Services 9,400 41,724
Titan Industries Ltd....................................... Recreation & Other Consumer Goods 75,000 126,754
Wockhardt.................................................. Health & Personal Care 2,500 11,783
------------
5,650,203
------------
INDONESIA 2.6%
Asia Pulp & Paper Co. Ltd., ADR............................ Forest Products & Paper 29,900 300,869
PT Bank Dagang Nasional Indonesia, fgn..................... Banking 637,500 40,568
*PT Bank Dagang Nasional Indonesia, wts.................... Banking 62,500 580
PT Bank Danamon, fgn....................................... Banking 2,233,000 142,100
*PT Bank International Indonesia, fgn...................... Banking 691,500 40,861
PT Barito Pacific Timber TBK............................... Forest Products & Paper 1,101,000 315,286
PT BDNI Capital Corporation, fgn........................... Financial Services 9,000 1,473
PT Charoen Pokphand Indonesia.............................. Food & Household Products 740,000 40,364
PT Ciputra Development..................................... Real Estate 987,000 44,864
PT Gadjah Tunggal.......................................... Automobiles 2,422,000 231,191
PT Hanjaya Mandala Sampoerna............................... Beverages & Tobacco 98,000 73,945
PT Indah Kiat Pulp & Paper Corp............................ Forest Products & Paper 1,997,750 354,147
*PT Indah Kiat Pulp & Paper Corp., wts..................... Forest Products & Paper 146,800 4,004
PT Indocement Tunggal Prakarsa............................. Building Materials & Components 1,532,500 501,545
PT Indofoods Sukses Makmur................................. Food & Household Products 353,685 115,751
PT Indosat................................................. Telecommunications 89,500 165,982
PT Jakarta International Hotel & Development............... Real Estate 122,000 23,845
PT Kalbe Farma............................................. Health & Personal Care 245,000 43,432
PT Modern Photo Film Co.................................... Multi-Industry 56,000 16,291
PT Pakuwon Jati............................................ Real Estate 336,000 27,491
PT Semen Cibinong, loc..................................... Building Materials & Components 1,368,500 62,205
PT Semen Gresik............................................ Building Materials & Components 221,500 129,880
PT Sinar Mas Agro Resources & Technology Corp.............. Food & Household Products 247,800 21,401
PT Sumalindo Lestari Jaya.................................. Forest Products & Paper 146,000 20,573
</TABLE>
TD- 11
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
INDONESIA (CONT.)
*PT Surya Hidup Sapwa.................................... Food & Household Products 482,500 $ 35,091
PT Tambang Timah (Persero)............................... Metals & Mining 1,025,000 1,099,545
PT Tempo Scan Pacific.................................... Health & Personal Care 174,000 13,445
PT Tjiwi Kimia TBK....................................... Forest Products & Paper 1,252,454 307,421
*PT Tjiwi Kimia TBK, wts................................. Forest Products & Paper 79,645 4,634
PT Ultra Jaya Milk....................................... Food & Household Products 1,791,000 325,636
PT United Tractors....................................... Machinery & Engineering 46,000 5,436
-----------
4,509,856
-----------
JORDAN 0.4%
*Jordan Cement Factories Ltd............................. Building Materials & Components 17,000 72,386
*Zara Investment Holdings Company Ltd.................... Leisure & Tourism 350,000 641,523
-----------
713,909
-----------
KAZAKHSTAN 0.4%
*Kazkommertsbank, ADR, 144A.............................. Banking 33,460 702,660
-----------
KENYA 0.4%
Kenya Airways Ltd........................................ Transportation 5,418,381 644,534
-----------
MALAYSIA 2.4%
AMMB Holdings Bhd........................................ Banking 77,600 50,875
Berjaya Singer Bhd., fgn................................. Appliances & Household Durables 81,000 25,823
Boustead Holdings Bhd., fgn.............................. Food & Household Products 282,000 233,459
Cement Industries of Malaysia Bhd........................ Building Materials & Components 21,000 12,310
*Edaran Otomobil Nasional Bhd., fgn...................... Automobiles 1,000 2,044
Federal Flour Mills Bhd.................................. Food & Household Products 35,000 27,896
Genting Berhad........................................... Leisure & Tourism 142,200 356,460
Hong Leong Industries Bhd................................ Multi-Industry 184,800 188,150
Hong Leong Industries Bhd., fgn., wts.................... Multi-Industry 19,500 1,805
Hong Leong Properties Bhd., fgn.......................... Real Estate 226,000 41,255
Island & Peninsula Bhd., fgn............................. Real Estate 403,000 269,392
Kian Joo Can Factory Bhd................................. Industrial Components 9,000 8,006
Leader Universal Holdings Bhd............................ Industrial Components 1,292,000 398,612
Malaysian Airline System Bhd............................. Transportation 144,000 115,511
MBF Capital Bhd.......................................... Financial Services 613,000 142,631
MBF Capital Bhd., fgn.................................... Financial Services 535,000 124,483
Oriental Holdings Bhd.................................... Automobiles 2,000 2,448
Perusahaan Otomobil Nasional Bhd., fgn................... Automobiles 50,000 48,849
Public Bank Bhd.......................................... Banking 622,400 193,625
Public Bank Bhd., fgn.................................... Banking 2,660,000 916,416
*Renong Bhd.............................................. Multi-Industry 1,106,000 511,840
Resorts World Bhd........................................ Leisure & Tourism 130,000 218,923
YTL Corp. Berhad......................................... Multi-Industry 221,000 298,303
-----------
4,189,116
-----------
MEXICO 6.9%
*Altos Hornos de Mexico SA............................... Metals & Mining 279,000 691,407
*Cemex SA, B............................................. Building Materials & Components 885,000 4,726,287
Cifra SA, C.............................................. Merchandising 39,000 87,467
Coca Cola Femsa SA de CV, ADR............................ Beverages & Tobacco 6,000 348,000
Cydea SA de CV........................................... Chemicals 36,000 100,366
DESC SA de CV DESC, C.................................... Multi-Industry 30,340 285,712
Fomento Economico Mexicano SA de CV, B................... Beverages & Tobacco 69,000 551,453
*Grupo Financiero Banamex Accival SA, L.................. Banking 594,000 1,530,909
*Grupo Financiero Bancomer SA de CV, B................... Banking 374,000 240,976
*Grupo Financiero Bancomer SA de CV, L................... Banking 2,899,000 1,153,062
*Grupo Financiero Serfin SA de CV, B..................... Banking 2,326,000 564,892
Panamerican Beverages Inc., A............................ Food & Household Products 38,700 1,262,587
Vitro SA................................................. Food & Household Products 92,000 405,254
-----------
11,948,372
-----------
</TABLE>
TD-12
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
PAKISTAN 1.9%
*Bank of Punjab.......................................... Banking 196,475 $ 83,714
*DG Khan Cement Co....................................... Building Materials & Components 2,586,000 481,871
Engro Chemical Pakistan Ltd.............................. Chemicals 114,880 297,995
Fauji Fertilizer Co. Ltd................................. Chemicals 37,000 70,837
National Development Leasing Corp........................ Financial Services 3,638,250 500,191
*Pakistan Electron Ltd................................... Appliances & Household Durables 563,000 67,167
*Pakistan International Airlines Corp.................... Transportation 1,649,600 254,903
Pakistan Telecommunications Corp., PTC, A................ Telecommunications 1,109,000 837,937
*Pakland Cement Co. Ltd.................................. Building Materials & Components 1,971,800 309,172
*Union Bank Ltd.......................................... Banking 1,426,000 345,110
-----------
3,248,897
-----------
PERU 1.1%
Telefonica del Peru SA, B, ADR........................... Telecommunications 78,800 1,837,025
-----------
PHILIPPINES 2.5%
*A Soriano Corp.......................................... Multi-Industry 6,397,500 249,581
*Belle Corp.............................................. Real Estate 20,996,000 808,735
Filinvest Development Corp............................... Real Estate 1,523,000 127,857
*Keppel Philippine Holdings Inc., B...................... Machinery & Engineering 17,471,260 1,052,589
Metro Pacific Corp., MDI................................. Multi-Industry 8,000 221
*Philex Mining Corp., B.................................. Metals & Mining 6,115,500 151,000
Philippine Commercial International Bank Inc............. Banking 280,460 796,368
*Philippine National Bank................................ Banking 345,931 760,194
RFM Corp................................................. Food & Household Products 859,000 139,985
RFM Corporation, 10.00%, conv., pfd...................... Food & Household Products 161,636 18,678
*Southeast Asia Cement Holdings Inc...................... Building Materials & Components 15,454,000 202,238
-----------
4,307,446
-----------
POLAND 4.3%
*Bank Handlowy W Warszawie SA, 144A...................... Banking 25,000 319,149
Bank Przemyslowo-Handlowy SA............................. Banking 1,000 51,915
Bank Rozwoju Eksportu SA................................. Banking 28,200 584,000
Big Bank Gdanski SA, GDR................................. Banking 538,150 526,700
*Big Bank Gdanski SA, GDR, reg........................... Banking 29,867 455,467
*Farm Food SA............................................ Food & Household Products 4,811 40,945
*Huta Olawa SA........................................... Metals & Mining 78,107 283,623
*Impexmetal SA, A........................................ Metals & Mining 93,892 751,136
*Lentex SA............................................... Building Materials & Components 19,090 292,443
Przedsiebiorstwo Cukiernicze Jutrzenka SA................ Food & Household Products 71,000 1,309,220
*Przedsiebiorstwo Handlu Zagranicznego Universal SA...... Wholesale & International Trade 1,102,000 2,329,050
*Rolimpex SA............................................. Wholesale & International Trade 42,415 96,261
Warta SA................................................. Insurance 13,400 159,279
Wielkopolski Bank Kredytowy SA........................... Banking 38,500 193,319
Zaklady Cementowo Wapiennicze Gorazdze Chorula........... Building Materials & Components 1,578 38,946
-----------
7,431,453
-----------
RUSSIA 3.4%
*Aeroflot................................................ Transportation 4,900 600,740
*Arkhangelsk Telecom, pfd................................ Telecommunications 260,000 72,800
*Cheliabenergo........................................... Telecommunications 20,000 10,600
GUM Trade House.......................................... Merchandising 10,000 27,750
Irkutskenergo............................................ Utilities Electrical & Gas 2,058,000 407,484
*Kamaz................................................... Automobiles 137,386 206,079
Krasnoyarsk Aluminum Plant............................... Metals & Mining 5,748 86,220
*Megionneftegaz.......................................... Energy Sources 33,500 174,200
Mosenergo................................................ Utilities Electrical & Gas 445,000 565,150
*Murmansk Sea Shipping................................... Transportation 3,000 45,000
Norilsk Nickel........................................... Metals & Mining 49,600 310,000
*Norilsk Nickel, pfd..................................... Metals & Mining 10,000 62,000
*Norilsk Nickel, rts..................................... Metals & Mining 24,800 2,480
</TABLE>
TD-13
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
RUSSIA (CONT.)
*Norilsk Nickel, pfd. rts................................ Metals & Mining 5,000 $ 250
Novorosissk Sea Shipping................................. Transportation 30,000 8,700
Novorosissk Sea Shipping., pfd........................... Transportation 224,000 28,000
Primorsk Sea Shipping.................................... Transportation 36,050 135,187
Rao Gazprom, ADR, 144A................................... Energy Sources 21,400 512,530
Red October.............................................. Food & Household Products 3,000 52,500
*Rostelekom.............................................. Telecommunications 153,000 543,150
Rostelekom, pfd.......................................... Telecommunications 257,300 599,509
*Saint Petersburg City Telephone Network, pfd., A........ Telecommunications 53,000 46,375
Tsum Trade House......................................... Merchandising 392,000 139,160
Unified Energy System.................................... Utilities Electrical & Gas 3,400,000 1,028,160
Unified Energy System, pfd............................... Utilities Electrical & Gas 200,000 43,100
*Uralmash Zavody......................................... Machinery & Engineering 15,032 137,167
-----------
5,844,291
-----------
SINGAPORE 3.9%
Acer Computer International Ltd.......................... Electrical & Electronics 188,000 172,960
*Acer Computer International Ltd., wts................... Electrical & Electronics 6,400 736
Acma Ltd................................................. Electrical & Electronics 263,000 181,003
Cycle & Carriage Ltd..................................... Wholesale & International Trade 47,000 193,800
First Capital Corp. Ltd.................................. Real Estate 184,000 170,300
First Capital Corp. Ltd., fgn............................ Real Estate 269,000 248,971
Fraser and Neave Ltd., fgn............................... Beverages & Tobacco 99,000 428,775
Hai Sun Hup Group Ltd.................................... Transportation 592,000 238,837
*Hai Sun Hup Group Ltd., wts............................. Transportation 84,600 6,776
*Hong Leong Finance Ltd.................................. Financial Services 192,000 205,043
Hour Glass Ltd........................................... Merchandising 1,159,000 446,959
Inchcape Bhd., fgn....................................... Wholesale & International Trade 153,000 235,105
*Inchcape Marketing Services, fgn........................ Broadcasting & Publishing 153,000 45,387
Isetan (Singapore) Ltd., fgn............................. Merchandising 49,000 73,260
Jurong Shipyard Ltd., fgn................................ Machinery & Engineering 197,000 935,034
Keppel Corp. Ltd......................................... Transportation 106,000 304,384
MCL Land Ltd............................................. Real Estate 467,000 270,142
Metro Holdings Ltd., fgn................................. Wholesale & International Trade 22,000 27,280
Natsteel Ltd............................................. Metals & Mining 78,000 105,512
Natsteel Ltd., fgn....................................... Metals & Mining 86,000 116,333
Neptune Orient Lines Ltd................................. Transportation 1,000 395
Osprey Maritime Ltd...................................... Transportation 269,000 215,455
Osprey Maritime Ltd., conv., pfd......................... Transportation 69,660 31,823
Overseas Union Enterprise Ltd............................ Leisure & Tourism 49,000 117,449
Overseas Union Trust, fgn................................ Financial Services 200,000 205,874
Robinson & Co. Ltd....................................... Merchandising 19,200 68,348
Sembawang Corp. Ltd...................................... Multi-Industry 411,000 877,840
United Industrial Corporation Ltd........................ Real Estate 144,000 56,387
United Industrial Corporation Ltd., fgn.................. Real Estate 1,430,000 559,953
United Overseas Land Ltd................................. Real Estate 29,000 24,432
Van Der Horst Ltd........................................ Machinery & Engineering 237,000 90,694
WBL Corp. Ltd............................................ Multi-Industry 26,000 24,064
-----------
6,679,311
-----------
SLOVAK REPUBLIC 0.9%
Nafta Gbely AS........................................... Utilities Electrical & Gas 9,195 325,439
Plastika Nitra........................................... Industrial Components 21,229 293,124
Slovakofarma AS.......................................... Health & Personal Care 1,029 143,054
Slovnaft AS.............................................. Chemicals 11,000 294,001
Vychodoslovenske Zeleziarne AS........................... Metals & Mining 23,857 468,146
-----------
1,523,764
-----------
</TABLE>
TD-14
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
SLOVENIA 0.3%
*Blagovno Trgovinski Center, GDR, 144A................... Real Estate 50,000 $ 385,000
*Blagovno Trgovinski Center, GDR, Reg S.................. Real Estate 13,000 100,100
-----------
485,100
-----------
SOUTH AFRICA 6.2%
Aeci Ltd................................................. Chemicals 21,000 65,591
Alpha Ltd................................................ Building Materials & Components 17,000 188,637
Anglo American Industrial Corp. Ltd...................... Multi-Industry 51,279 1,243,383
Anglovaal Industried Ltd................................. Multi-Industry 168,840 312,249
Bonnita Holdings Ltd..................................... Food & Household Products 80,000 20,549
BTR Dunlop Ltd........................................... Industrial Components 256,200 78,968
CG Smith Ltd............................................. Multi-Industry 132,000 542,484
Del Monte Royal Foods Ltd................................ Food & Household Products 1,411,300 928,010
Edgars Stores Ltd........................................ Textiles & Apparel 14,311 244,080
Engen Ltd................................................ Energy Sources 177,800 904,254
First National Bank Holdings Ltd......................... Banking 46,000 408,815
Foodcorp Ltd............................................. Food & Household Products 20,478 105,199
Irvin & Johnson Ltd...................................... Food & Household Products 1,142,700 563,543
Kersaf Investments Ltd................................... Leisure & Tourism 190,700 999,250
Malbak Ltd............................................... Multi-Industry 105,075 102,560
McCarthy Retail Ltd...................................... Appliances & Household Durables 334,192 686,719
McCarthy Retail Ltd., conv., zero coupon, 9/30/03........ Appliances & Household Durables 17,000 33,186
Palabora Mining Co. Ltd.................................. Metals & Mining 20,500 210,202
Polifin Ltd.............................................. Chemicals 13,600 19,562
*Rainbow Chicken Ltd..................................... Food & Household Products 4,765,601 205,646
Reunert Ltd.............................................. Electrical & Electronics 199,800 324,344
Sappi Ltd................................................ Forest Products & Paper 102,673 516,899
South African Breweries Ltd.............................. Beverages & Tobacco 24,460 603,144
South African Iron & Steel Industrial Corp. Ltd.......... Metals & Mining 2,375,390 702,879
Sun International Ltd.................................... Leisure & Tourism 1,452,200 596,815
Toyota South Africa Limited.............................. Automobiles 26,200 135,940
Voltex Holdings Ltd...................................... Electrical & Electronics 153,907 79,065
-----------
10,821,973
-----------
SOUTH KOREA 2.6%
Asia Cement Co. Ltd...................................... Building Materials & Components 14,390 69,191
Boram Bank Co. Ltd....................................... Banking 54,300 132,306
BYC Co. Ltd.............................................. Textiles & Apparel 1,190 52,304
Cho Hung Bank Co. Ltd.................................... Banking 64,000 130,832
Cho Hung Bank Co. Ltd., GDR.............................. Banking 94,000 178,600
Cho Hung Bank Co. Ltd., GDR 144A......................... Banking 90,000 171,000
Daegu Bank Co. Ltd....................................... Banking 44,516 100,325
Daewoo Electric Components Co. Ltd....................... Electronic Components & Instruments 45,000 94,911
Daewoo Electronics Co.................................... Electrical & Electronics 24,000 63,504
*Dongbu Steel Co. Ltd., fgn.............................. Metals & Mining 10,000 28,083
Dongkuk Steel Mill Co. Ltd............................... Metals & Mining 5,000 19,779
Hae In Corp. Ltd......................................... Merchandising 43,000 797,847
Hana Bank................................................ Banking 70,108 390,040
Hana Bank, GDR........................................... Banking 63,291 371,835
*Hotel Shilla Co......................................... Leisure & Tourism 9,200 19,350
*Kolon International Corp................................ Wholesale & International Trade 358,000 467,491
*Korea Express Co. Ltd................................... Transportation 9,000 35,310
Kukdong Oil & Chemical Co. Ltd........................... Chemicals 18,710 112,591
Kyong Nam Bank........................................... Banking 49,100 108,605
Kyung Dong Boiler Co. Ltd................................ Energy Equipment & Services 15,460 88,519
LG Electronics Inc....................................... Electrical & Electronics 18,000 136,460
LG Industrial Systems Ltd................................ Electrical & Electronics 15,000 58,850
Moon Bae Steel Co. Ltd................................... Metals & Mining 21,360 275,979
Saehan Precision Co. Ltd................................. Electrical & Electronics 8,090 63,240
Samsung Display Devices Ltd.............................. Electrical & Electronics 8,030 150,888
</TABLE>
TD-15
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SOUTH KOREA (CONT.)
*Samsung Heavy Industries Co. Ltd........................ Machinery & Engineering 66,000 $ 146,407
*Seah Steel Corp......................................... Metals & Mining 5,000 23,304
Shin Poong Paper Manufacturing Co. Ltd................... Forest Products & Paper 2,720 15,245
Ssangyong Oil Refining Co. Ltd........................... Energy Equipment & Services 15,270 64,593
Tong Yang Merchant Bank.................................. Financial Services 36,048 71,245
-----------
4,438,634
-----------
SRI LANKA 0.4%
National Development Bank of Sri Lanka................... Banking 118,000 439,036
Sampath Bank Ltd......................................... Banking 286,000 287,158
-----------
726,194
-----------
THAILAND 6.3%
Advanced Info Service Ltd., fgn.......................... Telecommunications 31,900 156,773
Asia Credit Public Co. Ltd............................... Financial Services 165,000 36,138
Ayudhya Insurance Public Co. Ltd., fgn................... Insurance 3,900 14,917
Bangkok Bank Public Co. Ltd.............................. Banking 940,687 1,728,613
Bangkok Insurance Public Co. Ltd......................... Insurance 32,000 184,615
Bangkok Insurance Public Co. Ltd., fgn................... Insurance 4,900 40,833
Bank of Ayudhya Public Co. Ltd., fgn..................... Banking 1,171,500 488,125
Banpu Public Co. Ltd..................................... Energy Sources 11,000 30,556
Banpu Public Co. Ltd., fgn............................... Energy Sources 2,000 8,248
Charoen Pokphand Feedmill Public Co. Ltd................. Food & Household Products 355,300 432,737
Chareon Pokphand Feedmill Public Co. Ltd., fgn........... Food & Household Products 82,700 204,983
*First Bangkok City Bank Public Co. Ltd.................. Banking 50,100 10,170
First Bangkok City Bank Public Co. Ltd., fgn............. Banking 299,900 60,236
Hana Microelectronics Co. Ltd............................ Electrical & Electronics 30,000 60,577
Hana Microelectronics Co. Ltd., fgn...................... Electrical & Electronics 68,000 155,833
*Hana Microelectronics Co. Ltd., sec..................... Electronic Components & Instruments 30,000 60,577
Industrial Finance Corp. of Thailand..................... Banking 6,200 861
Industrial Finance Corp. of Thailand, fgn................ Banking 643,200 101,703
Italian-Thai Development Public Co. Ltd.................. Construction & Housing 4,000 1,175
Italian-Thai Development Public Co. Ltd., fgn............ Construction & Housing 70,900 22,724
Jasmine International Public Co. Ltd..................... Telecommunications 48,000 9,436
Jasmine International Public Co. Ltd., fgn............... Telecommunications 663,000 141,667
Kian Gwan Public Co. Ltd................................. Real Estate 45,400 53,840
Land and House Public Co. Ltd., loc...................... Multi-Industry 161,600 31,077
Land and House Public Co. Ltd., fgn...................... Multi-Industry 172,678 35,421
*Land and House Public Co. Ltd., sec..................... Multi-Industry 243,778 47,537
Phatra Thanakit Public Co. Ltd........................... Multi-Industry 631,725 303,714
Phatra Thanakit Public Co. Ltd., fgn..................... Multi-Industry 320,800 183,363
Regional Container Lines Public Co. Ltd.................. Transportation 400 325
Regional Container Lines Public Co. Ltd., fgn............ Transportation 231,400 187,889
Saha Pathanapibul Public Co. Ltd., fgn................... Food & Household Products 430,500 413,942
Saha Union Public Co. Ltd................................ Multi-Industry 558,700 331,280
Saha Union Public Co. Ltd., fgn.......................... Multi-Industry 27,200 18,744
Sanyo Universal Electric Public Co. Ltd.................. Appliances & Household Durables 28,500 6,242
Sanyo Universal Electric Public Co. Ltd., fgn............ Appliances & Household Durables 81,300 17,806
Serm Suk Public Co. Ltd.................................. Food & Household Products 23,600 131,111
Serm Suk Public Co. Ltd., fgn............................ Food & Household Products 400 2,821
Siam Cement Public Co. Ltd............................... Building Materials & Components 11,050 56,667
Siam Cement Public Co. Ltd., fgn......................... Building Materials & Components 83,950 681,645
Siam City Bank Public Co. Ltd., fgn...................... Banking 2,199,700 152,757
Siam Commercial Bank..................................... Banking 346,204 361,783
Siam Commercial Bank Ltd., fgn........................... Banking 629,500 739,797
*Siam Makro Public Company Ltd., fgn..................... Merchandising 130,900 160,828
*Sino-Thai Engineering & Construction Public Co., fgn.... Construction & Housing 433,700 55,603
Thai Airways International Public Co. Ltd., fgn.......... Transportation 474,000 541,859
*Thai Engine Manufacturing Public Company Ltd............ Machinery & Engineering 43,000 73,504
*Thai Engine Manufacturing Public Company Ltd., fgn...... Machinery & Engineering 40,000 68,376
</TABLE>
TD-16
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
THAILAND (CONT.)
Thai Farmers Bank Public Co. Ltd......................... Banking 1,123,033 $ 1,439,786
Thai Investments and Securities Ltd...................... Financial Services 263,100 84,327
Thai Military Bank Ltd., fgn............................. Banking 885,300 189,167
Thai Petrochemical Industry Public Co. Ltd., fgn......... Chemicals 726,120 71,371
Thai Plastic and Chemical Co. Ltd., fgn.................. Chemicals 2,200 4,266
Thai Rayon Public Co. Ltd................................ Textiles & Apparel 34,900 46,981
Thai Rayon Public Co. Ltd., fgn.......................... Textiles & Apparel 100 135
*Thai Telephone & Telecommunication Public Co.
Ltd.,fgn............................................... Telecommunications 106,900 9,137
Thai Wacoal Public Co. Ltd............................... Textiles & Apparel 31,100 59,808
Thai Wah Public Co. Ltd., fgn............................ Multi-Industry 1,097,800 76,236
Tipco Asphalt Public Co. Ltd., fgn....................... Building Materials & Components 97,400 79,085
Total Access Communication Public Co. Ltd................ Telecommunications 192,200 65,348
United Communications Industries, fgn.................... Multi-Industry 312,000 130,000
-----------
10,865,075
-----------
TURKEY 3.8%
Akbank................................................... Banking 3,400,711 299,459
Alarko Gayrimenkul Yatirim Ortakigi AS................... Real Estate 1,253,000 33,857
Alarko Sanayii ve Ticaret SA............................. Appliances & Household Durables 1,148,333 109,431
*Anadolu Anonim Turk Sigorta Sirketi, br................. Insurance 17,000 541
Borusan AS............................................... Industrial Components 25,316,000 1,184,874
Cimentas Izmir Cimento Fabrikasi Turk AS................. Building Materials & Components 431,000 47,311
Cimsa Cimento Sanayi ve Ticaret AS....................... Building Materials & Components 189,000 10,259
Erciyas Biracilik........................................ Food & Household Products 3,404,000 476,314
Eregli Demir ve Celik Fabrikalari AS..................... Metals & Mining 4,148,000 640,463
Izocam Ticaret ve Sanayii AS, br......................... Building Materials & Components 34,168,000 1,187,019
Kartonsan................................................ Forest Products & Paper 1,041,000 64,042
*Netas Northern Electric Telekomunic Asyon AS............ Electrical & Electronics 248,000 89,747
Petkim Petrokimya Holding AS............................. Chemicals 677,000 367,491
*Sabanci Holdings AS..................................... Multi-Industry 740,000 45,525
Sasa Suni Ve Sentetik Elyaf Sanayi AS.................... Chemicals 1,400,000 75,995
Tat Konserve Sanayii AS.................................. Food & Household Products 2,679,997 126,726
Tofas Turk Otomobil Fabrikasi AS......................... Automobiles 3,795,500 215,185
Turk Demir Dokum, br..................................... Appliances & Household Durables 25,005,998 1,387,546
Turkiye Garanti Bankasi AS............................... Banking 3,577,887 176,952
Vakif Finansal Kiralama AS............................... Financial Services 1,151,000 14,717
-----------
6,553,454
-----------
VENEZUELA
Ceramica Carabobo CA, A, ADR............................. Building Materials & Components 66,955 50,452
-----------
ZIMBABWE 0.5%
Delta Corp............................................... Multi-Industry 604 407
TA Holdings.............................................. Multi-Industry 5,428,000 673,013
Zimbabwe Sun Ltd......................................... Multi-Industry 1,303,831 203,833
-----------
877,253
-----------
TOTAL LONG TERM SECURITIES
(COST $198,938,319)............................ 129,961,568
-----------
</TABLE>
TD-17
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT** VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 19.8%
Federal Farm Credit Banks, 5.62% to 5.65%, with
maturities to 4/01/98.................................. $ 6,500,000 $ 6,498,961
Federal Home Loan Bank, 5.53% to 5.60%, with maturities
to 1/13/98............................................. 5,000,000 4,993,251
Federal Home Loan Mortgage Corp., 5.59% to 5.68% with
maturities to 2/06/98.................................. 7,041,000 7,022,669
Federal National Mortgage Assn., 5.54% to 5.80%, with
maturities to 3/04/98.................................. 14,842,000 14,788,303
U.S. Treasury Bill, 5.16%, 1/22/98....................... 1,000,000 997,222
-----------
TOTAL SHORT TERM INVESTMENTS
(COST $34,292,121)............................. 34,300,406
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT
(COST $233,230,440)............................ 164,261,974
-----------
(A)REPURCHASE AGREEMENT 4.2%
Deutsche Bank AG, 5.50%, 1/02/98, (Maturity Value
$7,241,212) (COST $7,239,000) Collateral: U.S. Treasury
Note................................................... 7,239,000 7,239,000
-----------
TOTAL INVESTMENTS (COST $240,469,440) 99.1%....... 171,500,974
OTHER ASSETS, LESS LIABILITIES 0.9%............... 1,527,279
-----------
TOTAL NET ASSETS 100.0%........................... $173,028,253
===========
</TABLE>
*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS.
(a)AT DECEMBER 31, 1997, ALL REPURCHASE AGREEMENTS HELD BY THE FUND HAD BEEN
ENTERED INTO ON THAT DATE.
See Notes to Financial Statements.
TD-18
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(cost $233,230,440) $164,261,974
Repurchase agreement, at value and
cost 7,239,000
Cash 598,268
Receivables:
Investment securities sold 1,344,936
Fund shares sold 4,911,363
Dividends and interest 380,002
------------
Total assets 178,735,543
------------
Liabilities:
Payables:
Investment securities purchased 5,179,858
Fund shares redeemed 90,609
To affiliates 190,913
Other liabilities 245,910
------------
Total liabilities 5,707,290
------------
Net assets, at value $173,028,253
============
Net assets consist of:
Undistributed net investment income $ 2,681,614
Net unrealized depreciation (68,968,466)
Accumulated net realized loss (4,183,736)
Beneficial shares 243,498,841
------------
Net assets, at value $173,028,253
============
Class 1:
Net asset value per share
($163,458,911 / 24,640,374
shares outstanding) $ 6.63
============
Class 2:
Net asset value per share
($9,569,342 / 1,444,784
shares outstanding) $ 6.62
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of
$319,288)
Dividends $ 3,390,412
Interest 1,360,701
-----------
Total investment income $ 4,751,113
Expenses:
Management fees (Note 3) 1,859,449
Administrative fees (Note 3) 146,221
Distribution fees (Note 3)
Class 2 10,514
Custodian fees 230,339
Reports to shareholders 61,710
Professional fees (Note 3) 16,889
Trustees' fees and expenses 5,500
Other 1,839
-----------
Total expenses 2,332,461
------------
Net investment income 2,418,652
------------
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments (4,166,780)
Foreign currency transactions 320,547
-----------
Net realized loss (3,846,233)
Net unrealized
depreciation on
investments (67,576,957)
------------
Net realized and unrealized
loss (71,423,190)
------------
Net decrease in net assets
resulting from operations $(69,004,538)
============
</TABLE>
See Notes to Financial Statements.
TD-19
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996+
---------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................................. $ 2,418,652 $ 381,731
Net realized gain (loss) from investments and foreign currency transactions....... (3,846,233) 240,154
Net unrealized depreciation on investments........................................ (67,576,957) (1,391,509)
----------------------------
Net decrease in net assets resulting from operations........................... (69,004,538) (769,624)
----------------------------
Distributions to shareholders from:
Net investment income:
Class 1.......................................................................... (397,958) --
Net realized gains:
Class 1.......................................................................... (298,468) --
Fund share transactions (Note 2):
Class 1.......................................................................... 157,129,181 73,014,790
Class 2.......................................................................... 13,354,870 --
----------------------------
Net increase in net assets..................................................... 100,783,087 72,245,166
----------------------------
Net assets:
Beginning of year.................................................................. 72,245,166 --
----------------------------
End of year........................................................................ $173,028,253 $72,245,166
============================
Undistributed net investment income included in net assets:
End of year........................................................................ $ 2,681,614 $ 381,731
============================
</TABLE>
+FOR THE PERIOD MARCH 4, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996.
See Notes to Financial Statements.
TD-20
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Developing Markets Fund (the Fund) is a separate, diversified series
of Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers in countries having developing markets. The following summarizes the
Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the funds comprising
the Trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
TD-21
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. BENEFICIAL SHARES
The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996*
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold.......................................................... 17,460,410 $161,550,248 7,686,505 $73,253,158
Shares issued on reinvestment of distributions....................... 66,963 696,426 -- --
Shares redeemed...................................................... (547,862) (5,117,493) (25,642) (238,368)
----------
Net increase......................................................... 16,979,511 $157,129,181 7,660,863 $73,014,790
==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997**
--------------------------
SHARES AMOUNT
--------------------------
<S> <C> <C>
CLASS 2 SHARES:
Shares sold.......................................................... 1,574,880 $ 14,398,499
Shares redeemed...................................................... (130,096) (1,043,629)
--------------------------
Net increase......................................................... 1,444,784 $ 13,354,870
==========================
</TABLE>
*COMMENCEMENT OF SALES OF CLASS 1 SHARES WAS MARCH 4, 1996.
**EFFECTIVE DATE OF CLASS 2 SHARES WAS MAY 1, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton Asset
Management Ltd. (TAML), Templeton Funds Annuity Company (TFAC) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.
The Fund pays an investment management fee to TAML of 1.25% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to TFAC based on the Trust's aggregate average daily net
assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
TD-22
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)
The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.
Included in professional fees are legal fees of $833 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
At December 31, 1997, the net unrealized depreciation based on the cost of
investments for income tax purposes of $245,575,693 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................................................... $ 8,839,564
Unrealized depreciation........................................................................... (82,914,283)
-------------
Net unrealized depreciation....................................................................... $ (74,074,719)
=============
</TABLE>
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $170,482,854 and $28,950,229, respectively.
TD-23
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Templeton Developing Markets Fund, series
of Templeton Variable Products Series Fund (the Trust) as of December 31, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended and
the financial highlights for the period indicated. 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, 1997, 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 the
Templeton Developing Markets Fund, series of Templeton Variable Products Series
Fund as of December 31, 1997, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.
[McGladrey & Pullen, LLP]
New York, New York
January 30, 1998
TD- 24
<PAGE>
TEMPLETON ASSET ALLOCATION FUND
- --------------------------------------------------------------------------------
Investment Objective: 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 among these three market segments depending upon worldwide market
and economic conditions.
- --------------------------------------------------------------------------------
Global equity markets produced mixed results in 1997. Although currency crises
in Southeast Asia caused many Asian shares to plummet in value during the latter
part of the year, U.S., European, and Latin American markets provided impressive
returns for the period as a whole.
Propelled by relatively moderate U.S. economic growth and subdued inflation, the
Dow Jones(R) Industrial Average advanced 25%.* This marked the third consecutive
year that the Dow experienced a gain of more than 20% - the first time in
history for such an occurrence. The financial services industry strengthened
considerably, benefiting our position in Morgan Stanley, Dean Witter Discover &
Co., and we took profits by selling our holdings of American Express Co. and
Federal National Mortgage Association. However, given the high price/earnings
ratio of the U.S. equity markets in general, we were unable to find many stocks
selling below our estimate of their true value.
In Europe, the Fund's largest geographic exposure, strong corporate earnings and
low inflation contributed to the rise of many stock markets. Some registered
returns exceeding those of the U.S. market. Our shares of British Gas PLC and
Alcatel Alsthom Cie Generale D'Electricite SA appreciated substantially in
value, contributing to the Fund's positive results. During the year, we sold our
Barclays PLC holdings as the stock reached full valuation. An addition to the
Fund's top 10 holdings was British Steel PLC, ADR, one of the world's largest
steel producers, which was trading at a compelling valuation.
*The Dow Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc. and includes reinvested dividends. Index is unmanaged and one
cannot invest directly in an index.
TEMPLETON ASSET ALLOCATION FUND
Asset Distribution Based on Total Net Assets
12/31/97
<TABLE>
<S> <C>
Stocks 79.5%
Bonds 17.9%
Short-Term Investments & Other Net Assets 2.6%
</TABLE>
TEMPLETON ASSET ALLOCATION FUND
Geographic Distribution Based on Total Net Assets
12/31/97
<TABLE>
<S> <C>
Europe 48.1%
North America 21.1%
Latin America 16.4%
Australia/New Zealand 6.2%
Asia 5.6%
Short-Term Investments & Other Net Assets 2.6%
</TABLE>
TA-1
<PAGE>
A sound economic environment and continued capital inflows into Latin America
helped the region's equity markets deliver impressive returns during the
reporting period. The telecommunications sector performed well, and our holdings
of Telefonos de Mexico SA, L, ADR and Telecomunicacoes Brasileiras SA, pfd.
appreciated significantly in value.
Excessive private and public debt levels, as well as weak currencies roiled the
Asian markets, and many of them, including Thailand, Indonesia, South Korea, and
Malaysia, experienced steep declines. With limited exposure to those markets,
the Fund was spared from the full extent of the carnage. We view the downturn in
these markets as offering us the opportunity to find bargains; however, we will
proceed with the utmost caution.
With regard to fixed-income securities, U.S. bond prices rose substantially due
to a strong dollar and subdued inflation. European bond prices (measured in
local currency terms) also moved higher, as government efforts to meet standards
for membership in the European Monetary Union led to lower interest rates.
Responding to these conditions, we made several changes to the Fund's fixed-
income asset allocation. In an effort to reduce our exposure to depreciating
currencies, we increased our U.S. position. Attempting to preserve capital, we
also slightly reduced the average maturity of our holdings from industrial
countries, while modestly increasing the average maturity of Latin American
holdings.
TEMPLETON ASSET
ALLOCATION FUND
Top 10 Equity Holdings on 12/31/97 Based on Total Net
Assets
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
Axa SA
Financial Services, France 2.5%
Philips Electronics NV
Electrical & Electronics,
Netherlands 2.3%
Banque Nationale de Paris
Banking, France 2.2%
YPF Sociedad Anonima, ADR
Energy Sources,
Argentina 2.1%
Zuerich Versicherung, new
Insurance, Switzerland 1.9%
BTR PLC
Industrial Components,
United Kingdom 1.8%
British Gas PLC
Utilities Electrical & Gas,
United Kingdom 1.7%
British Steel PLC, ADR
Metals & Mining,
United Kingdom 1.7%
Merita Ltd., A
Banking, Finland 1.7%
Autoliv Inc.
Automobiles, Sweden 1.6%
For a complete list of portfolio
holdings, please see the Fund's
Statement of Investments.
TA-2
<PAGE>
Please remember that this discussion accurately reflects our views and opinions
as of December 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly, which may affect our strategies and
portfolio holdings. Although historic performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
It is important to remember that investments in foreign securities involve
special risks including changes in currency values, market price swings, and
economic, social, and political developments in the countries where the
portfolios are invested. Developing markets involve similar but higher risks
related to their smaller size and lesser liquidity. These risks are discussed in
the prospectus.
We thank you for investing in the Templeton Asset Allocation Fund, and welcome
any comments or suggestions you may have.
Sincerely,
/s/ Gary R. Clemons
Gary R. Clemons
Portfolio Manager
Templeton Asset Allocation Fund
/s/ Thomas Latta
Thomas Latta
Portfolio Manager
Templeton Asset Allocation Fund
TA-3
<PAGE>
PERFORMANCE SUMMARY
CLASS 2
Templeton Asset Allocation Fund - Class 2 delivered a 15.37% total return for
the 12-month period ended December 31, 1997. Total return of Class 2 shares
represents the cumulative or average annual change in value, assuming
reinvestment of dividends and capital gains. For periods of less than one year,
aggregate annual figures are shown. Past expense reductions by the manager
increased returns.
The graph on the following page compares the performance of the Fund - Class 2
shares since inception with the unmanaged J.P. Morgan Global Government Bond
Index. The J.P. Morgan Global Government Bond Index includes only actively
traded fixed-rate bonds with a remaining maturity of one year or longer and is
an aggregate of government securities issued in 13 countries. The graph also
compares the Fund's performance with that of the unmanaged Morgan Stanley
Capital International (MSCI) World Index and the Consumer Price Index. The MSCI
World index includes approximately 1,500 companies representing the stock
markets of 23 countries, including the U.S., Canada, the United Kingdom, and
Japan. The Consumer Price Index (CPI) is a commonly used measure of inflation.
Please remember that the Fund's performance differs from that of an index
because an index is not managed, does not contain cash (the Fund generally
carries a certain percentage of cash at any given time), and includes no sales
charges or management expenses. Of course, one cannot invest directly in an
index, nor is an index representative of the Fund's portfolio.
NOTE: PERFORMANCE REFLECTS THE FUND - CLASS 2'S OPERATING EXPENSES, BUT DOES NOT
INCLUDE ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE
CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. THESE CHARGES AND DEDUCTIONS, PARTICULARLY FOR
VARIABLE LIFE POLICIES, CAN HAVE A SIGNIFICANT EFFECT ON CONTRACT VALUES AND
INSURANCE BENEFITS. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS PROVIDED BY
THE INSURANCE COMPANY.
TA- 4
<PAGE>
<TABLE>
<CAPTION>
- NOTE: First period return inception date is 08/24/88
Monthly US Dollar US Dollar US Dollar
Templeton Variable Products Asset Allocation Fund MSCI World Index CPI Index
Acct 8155 Acct-1 Acct-152
<S> <C> <C> <C>
INCEPT 10,000 10,000 $10,000
Aug-88 10,000 9,798 $10,009
Sep-88 10,070 10,215 $10,077
Oct-88 10,380 10,897 $10,110
Nov-88 10,320 11,278 $10,119
Dec-88 10,280 11,382 $10,136
Jan-89 10,560 11,796 $10,187
Feb-89 10,440 11,723 $10,228
Mar-89 10,550 11,650 $10,286
Apr-89 10,781 11,921 $10,354
May-89 10,781 11,631 $10,413
Jun-89 10,721 11,501 $10,439
Jul-89 11,302 12,803 $10,464
Aug-89 11,402 12,495 $10,481
Sep-89 11,352 12,850 $10,514
Oct-89 10,971 12,423 $10,565
Nov-89 11,161 12,921 $10,590
Dec-89 11,642 13,339 $10,606
Jan-90 11,352 12,718 $10,715
Feb-90 11,372 12,175 $10,766
Mar-90 11,535 11,442 $10,825
Apr-90 11,134 11,279 $10,842
May-90 11,822 12,469 $10,867
Jun-90 11,915 12,382 $10,926
Jul-90 12,090 12,497 $10,967
Aug-90 11,206 11,329 $11,068
Sep-90 10,302 10,137 $11,161
Oct-90 10,210 11,085 $11,228
Nov-90 10,508 10,905 $11,253
Dec-90 10,713 11,136 $11,253
Jan-91 11,227 11,545 $11,321
Feb-91 11,946 12,616 $11,337
Mar-91 11,801 12,246 $11,354
Apr-91 11,939 12,344 $11,371
May-91 12,268 12,626 $11,404
Jun-91 11,748 11,848 $11,438
Jul-91 12,427 12,410 $11,455
Aug-91 12,714 12,372 $11,488
Sep-91 12,820 12,699 $11,540
Oct-91 12,916 12,907 $11,556
Nov-91 12,597 12,347 $11,589
Dec-91 13,680 13,248 $11,598
Jan-92 13,563 13,005 $11,615
Feb-92 13,934 12,782 $11,657
Mar-92 13,766 12,183 $11,716
Apr-92 14,116 12,354 $11,733
May-92 14,708 12,848 $11,749
Jun-92 14,664 12,420 $11,791
Jul-92 14,840 12,454 $11,817
Aug-92 14,664 12,759 $11,850
Sep-92 14,610 12,644 $11,883
Oct-92 14,500 12,305 $11,926
Nov-92 14,610 12,527 $11,942
Dec-92 14,785 12,631 $11,935
Jan-93 14,982 12,675 $11,993
Feb-93 15,333 12,977 $12,035
Mar-93 15,650 13,733 $12,078
Apr-93 15,954 14,371 $12,111
May-93 16,225 14,705 $12,128
Jun-93 16,360 14,584 $12,145
Jul-93 16,619 14,887 $12,144
Aug-93 17,408 15,571 $12,178
Sep-93 17,419 15,286 $12,203
Oct-93 18,005 15,710 $12,254
Nov-93 17,656 14,824 $12,263
Dec-93 18,647 15,552 $12,262
Jan-94 19,549 16,580 $12,296
Feb-94 18,816 16,368 $12,339
Mar-94 17,991 15,666 $12,381
Apr-94 18,152 16,152 $12,398
May-94 18,279 16,197 $12,405
Jun-94 17,783 16,155 $12,447
Jul-94 18,498 16,464 $12,481
Aug-94 19,017 16,963 $12,532
Sep-94 18,625 16,521 $12,565
Oct-94 18,821 16,993 $12,574
Nov-94 18,221 16,260 $12,591
Dec-94 18,095 16,420 $12,591
Jan-95 17,898 16,177 $12,640
Feb-95 18,302 16,416 $12,691
Mar-95 18,586 17,210 $12,733
Apr-95 19,190 17,813 $12,775
May-95 19,900 17,969 $12,800
Jun-95 20,255 17,967 $12,825
Jul-95 21,013 18,869 $12,825
Aug-95 20,836 18,452 $12,860
Sep-95 21,522 18,993 $12,884
Oct-95 21,096 18,698 $12,926
Nov-95 21,747 19,351 $12,917
Dec-95 22,173 19,920 $12,909
Jan-96 22,741 20,283 $12,984
Feb-96 22,931 20,411 $13,027
Mar-96 23,143 20,755 $13,094
Apr-96 23,706 21,246 $13,144
May-96 24,031 21,268 $13,169
Jun-96 23,994 21,380 $13,178
Jul-96 23,368 20,628 $13,203
Aug-96 23,944 20,870 $13,228
Sep-96 24,419 21,691 $13,270
Oct-96 24,719 21,845 $13,312
Nov-96 26,182 23,073 $13,337
Dec-96 26,357 22,708 $13,337
Jan-97 27,357 22,985 $13,379
Feb-97 27,628 23,254 $13,419
Mar-97 27,342 22,798 $13,453
Apr-97 27,642 23,547 $13,469
May-97 29,208 25,005 $13,461
Jun-97 30,380 26,255 $13,477
Jul-97 32,151 27,469 $13,493
Aug-97 30,639 25,636 $13,519
Sep-97 32,764 27,032 $13,552
Oct-97 30,298 25,614 $13,586
Nov-97 30,380 26,070 $13,578
Dec-97 30,407 26,392 $13,562
</TABLE>
* Index includes reinvested dividends or interest.
** Source: U.S. Bureau of Labor Statistics, December 31, 1997.
TEMPLETON ASSET ALLOCATION FUND - CLASS 2
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE SINCE CLASS 2
INCEPTION INCEPTION
1-YEAR* 3-YEAR* 5-YEAR* (8/24/88)* (5/1/97)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Annual Total
Return 15.37% 18.88% 15.52% 12.63% --
Cumulative Total Return 15.37% 68.05% 105.66% 204.07% --
Value of $10,000
Investment $11,537 $16,805 $20,566 $30,407 $10,941
Aggregate Total Return -- -- -- -- 9.41%
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------------------------------------------------------------------------------------------------
One-Year Total Return* 26.12% -2.96% 22.48% 18.93% 15.37%
</TABLE>
*Because Class 2 shares were not offered until May 1, 1997, performance shown
for periods prior to that date represents the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%.
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to their smaller size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance cannot predict or guarantee future results.
TA- 5
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 1
(For a share outstanding throughout the year)
Net asset value, beginning of year............................. $21.08 $18.72 $15.69 $16.55 $13.49
---------------------------------------------------------------
Income from investment operations:
Net investment income......................................... .67 .63 .57 .44 .42
Net realized and unrealized gain (loss)....................... 2.44 2.76 2.87 (.92) 3.03
---------------------------------------------------------------
Total from investment operations............................... 3.11 3.39 3.44 (.48) 3.45
---------------------------------------------------------------
Less distributions from:
Net investment income......................................... (.63) (.58) (.41) (.31) (.35)
Net realized gains............................................ (1.21) (.45) -- (.07) (.04)
---------------------------------------------------------------
Total distributions............................................ (1.84) (1.03) (.41) (.38) (.39)
---------------------------------------------------------------
Net asset value, end of year................................... $22.35 $21.08 $18.72 $15.69 $16.55
===============================================================
Total Return*.................................................. 15.52% 18.93% 22.48% (2.96)% 26.12%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)................................ $735,568 $556,027 $406,123 $288,172 $183,360
Ratios to average net assets:
Expenses...................................................... .74% .64% .66% .75% .77%
Net investment income......................................... 3.32% 3.56% 3.73% 4.02% 4.16%
Portfolio turnover rate........................................ 45.27% 57.50% 43.02% 51.36% 81.50%
Average commission rate paid**................................. $.0071 $.0008 -- -- --
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
TA-6
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
1997+
------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS 2
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................................................. $20.40
-----
Income from investment operations:
Net investment income............................................................................................. .16
Net realized and unrealized gain.................................................................................. 1.76
-----
Total from investment operations................................................................................... 1.92
-----
Net asset value, end of year....................................................................................... $22.32
=====
Total Return*...................................................................................................... 9.41%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's).................................................................................... $9,665
Ratios to average net assets:
Expenses.......................................................................................................... 1.03%***
Net investment income............................................................................................. 1.97%***
Portfolio turnover rate............................................................................................ 45.27%
Average commission rate paid **.................................................................................... $.0071
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
***ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TA-7
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 74.1%
AEROSPACE & MILITARY TECHNOLOGY
Raytheon Co., A............................................. United States 2,550 $ 125,747
------------
APPLIANCES & HOUSEHOLD DURABLES 0.5%
Sony Corp................................................... Japan 42,000 3,731,332
------------
AUTOMOBILES 4.4%
Autoliv Inc., fgn. ......................................... Sweden 129,000 4,199,864
Autoliv Inc................................................. Sweden 246,900 8,085,975
Fiat SpA.................................................... Italy 2,361,700 6,850,132
Ford Motor Co............................................... United States 84,000 4,089,750
General Motors Corp......................................... United States 40,000 2,425,000
Volvo AB, B................................................. Sweden 260,000 6,974,899
------------
32,625,620
------------
BANKING 9.3%
Bangkok Bank Public Co. Ltd., fgn........................... Thailand 157,800 404,615
Bankinter SA................................................ Spain 118,875 6,741,582
Banque Nationale de Paris................................... France 303,200 16,115,923
Banque Nationale de Paris, ADR, 144A........................ France 5,400 287,025
Canadian Imperial Bank of Commerce.......................... Canada 140,000 4,369,336
Citicorp.................................................... United States 30,000 3,793,125
Credit Suisse Group, reg.................................... Switzerland 15,250 2,357,952
Den Norske Bank............................................. Norway 2,178,900 10,281,454
HSBC Holdings PLC........................................... Hong Kong 234,400 5,777,571
Merita Ltd., A.............................................. Finland 2,250,000 12,304,558
National Australia Cap Sec PLC.............................. Australia 159,874 4,546,417
Sparbanken AB, A............................................ Sweden 113,800 2,587,048
------------
69,566,606
------------
BROADCASTING & PUBLISHING 0.7%
News Corp. Ltd., ADR........................................ Australia 160,000 3,570,000
South China Morning Post Ltd................................ Hong Kong 2,821,000 1,984,056
------------
5,554,056
------------
BUSINESS & PUBLIC SERVICES 0.4%
Waste Management Inc........................................ United States 100,000 2,750,000
------------
CHEMICALS 2.6%
Akzo Nobel NV............................................... Netherlands 48,700 8,396,676
DSM NV...................................................... Netherlands 25,000 2,283,432
Rhone-Poulenc SA, A......................................... France 201,800 9,039,674
------------
19,719,782
------------
DATA PROCESSING & REPRODUCTION 2.9%
*3com Corp.................................................. United States 320,800 11,207,950
*Bay Networks Inc........................................... United States 150,000 3,834,375
*NCR Corp................................................... United States 7,562 210,318
*Newbridge Networks Corp.................................... Canada 180,000 6,277,500
------------
21,530,143
------------
ELECTRICAL & ELECTRONICS 5.4%
Alcatel Alsthom Cie Generale D'Electricite SA............... France 92,119 11,709,070
*DSC Communications Corp.................................... United States 227,900 5,469,600
Hitachi Ltd................................................. Japan 80,000 569,809
Motorola Inc................................................ United States 94,000 5,363,875
Philips Electronics NV...................................... Netherlands 287,100 17,217,646
------------
40,330,000
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.9%
BICC PLC.................................................... United Kingdom 570,000 1,610,169
Intel Corp.................................................. United States 72,000 5,058,000
------------
6,668,169
------------
</TABLE>
TA-8
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 2.6%
Rao Gazprom, ADR, 144A...................................... Russia 156,300 $ 3,743,385
YPF Sociedad Anonima, ADR................................... Argentina 451,400 15,432,238
------------
19,175,623
------------
FINANCIAL SERVICES 4.4%
American Express Co......................................... United States 60,000 5,355,000
Axa SA...................................................... France 239,700 18,547,527
Morgan Stanley, Dean Witter Discover & Co................... United States 149,366 8,831,265
Peregrine Investments Holdings Ltd.......................... Hong Kong 350,000 248,419
*Peregrine Investments Holdings Ltd., wts................... Hong Kong 35,000 45
------------
32,982,256
------------
FOOD & HOUSEHOLD PRODUCTS 0.2%
Unilever NV................................................. Netherlands 13,600 838,409
Unilever PLC................................................ Netherlands 49,200 421,393
------------
1,259,802
------------
FOREST PRODUCTS & PAPER 1.3%
Assidomaen AB............................................... Sweden 90,000 2,278,366
Carter Holt Harvey Ltd...................................... New Zealand 293,020 452,577
Enso OY, R.................................................. Finland 225,000 1,746,587
International Paper Co...................................... United States 50,000 2,156,250
Stora Kopparbergs Bergslags AB, B........................... Sweden 225,000 2,791,282
------------
9,425,062
------------
HEALTH & PERSONAL CARE 1.8%
Aetna Inc................................................... United States 16,700 1,178,394
Medeva PLC.................................................. United Kingdom 4,572,675 12,128,613
------------
13,307,007
------------
INDUSTRIAL COMPONENTS 3.4%
BTR PLC..................................................... United Kingdom 4,357,600 13,347,333
Goodyear Tire & Rubber Co................................... United States 60,000 3,817,500
*Granges AB................................................. Sweden 183,200 2,872,631
Madeco Manufacturera de Cobre SA, ADR....................... Chile 162,500 2,478,125
SKF AB, B................................................... Sweden 117,500 2,500,976
------------
25,016,565
------------
INSURANCE 5.2%
Allstate Corp............................................... United States 40,000 3,635,000
ING Groep NV................................................ Netherlands 125,000 5,264,715
Skandia Foersaekrings AB.................................... Sweden 245,000 11,555,876
Torchmark Corp.............................................. United States 90,000 3,785,625
Zuerich Versicherung, new................................... Switzerland 29,900 14,237,608
------------
38,478,824
------------
MACHINERY & ENGINEERING 0.7%
*Gradall Industries Inc..................................... United States 314,000 5,181,000
------------
MERCHANDISING 1.0%
Dairy Farm International Holdings Ltd....................... Hong Kong 1,000,000 1,080,000
David Jones Ltd............................................. Australia 1,473,400 1,661,300
Home Depot Inc.............................................. United States 50,000 2,943,750
Sears Roebuck & Co.......................................... United States 42,000 1,900,500
------------
7,585,550
------------
METALS & MINING 2.8%
British Steel PLC, ADR...................................... United Kingdom 589,300 12,633,119
Companhia Siderurgica Nacional Sid Nacional................. Brazil 16,100,000 447,202
Essar Steel Ltd., FRN, 7/15/99, 144A........................ India 445,000 404,950
</TABLE>
TA-9
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING (CONT.)
*Minorco SA, ADR............................................ Luxembourg 352,950 $ 5,911,912
Reynolds Metals Co.......................................... United States 22,000 1,320,000
------------
20,717,183
------------
MULTI-INDUSTRY 1.8%
Alfa SA de CV, A............................................ Mexico 1,150,000 7,794,437
Hicom Holdings Bhd.......................................... Malaysia 2,874,600 1,655,509
Hutchison Whampoa Ltd....................................... Hong Kong 444,000 2,784,669
Jardine Matheson Holdings Ltd............................... Hong Kong 220,800 1,126,080
Jardine Strategic Holdings Ltd.............................. Hong Kong 168,750 445,500
------------
13,806,195
------------
REAL ESTATE 0.7%
Cheung Kong Holdings Ltd.................................... Hong Kong 600,000 3,929,539
New World Development Co. Ltd............................... Hong Kong 303,543 1,049,807
------------
4,979,346
------------
TELECOMMUNICATIONS 10.5%
AT&T Corp................................................... United States 121,000 7,411,250
Lucent Technologies Inc..................................... United States 102,214 8,164,343
MCI Communications Corp..................................... United States 196,000 8,391,250
Nokia AB, A................................................. Finland 122,000 8,530,059
PT Indosat TBK, ADR......................................... Indonesia 159,400 3,078,412
Telecomunicacoes Brasileiras SA............................. Brazil 22,228,000 2,260,542
Telecom Italia SpA.......................................... Italy 477,000 3,051,290
Telecom Italia SpA, di Risp................................. Italy 1,200,000 5,272,810
Telefonica de Argentina SA, B, ADR.......................... Argentina 315,000 11,733,750
Telefonica de Espana SA..................................... Spain 260,000 7,423,695
Telefonica Del Peru SA, B, ADR.............................. Peru 131,800 3,072,588
Telefonos de Mexico SA, L, ADR.............................. Mexico 180,900 10,141,706
------------
78,531,695
------------
TEXTILES & APPAREL 0.8%
*Fruit of the Loom Inc., A.................................. United States 160,000 4,100,000
Nike Inc., B................................................ United States 40,000 1,570,000
------------
5,670,000
------------
TRANSPORTATION 5.2%
Air New Zealand Ltd., B..................................... New Zealand 2,564,000 5,136,307
*Fritz Companies Inc........................................ United States 350,000 4,878,125
Koninklijke Nedlloyd NV..................................... Netherlands 50,000 1,134,318
Kvaerner Industrier AS, B................................... Norway 215,000 9,999,322
Mayne Nickless Ltd., A...................................... Australia 1,480,900 7,827,585
Qantas Airways Ltd., ADR, 144A.............................. Australia 376,000 6,636,400
Unitor ASA.................................................. Norway 286,000 3,490,169
------------
39,102,226
------------
UTILITIES ELECTRICAL & GAS 4.6%
British Gas PLC............................................. United Kingdom 2,823,529 12,706,066
*Centrica PLC............................................... United Kingdom 3,200,000 4,624,885
*CEZ AS..................................................... Czech Republic 7,580 248,751
Endesa SA, ADR.............................................. Spain 88,000 1,600,500
Endesa SA, br............................................... Spain 122,000 2,166,131
Hong Kong Electric Holdings Ltd............................. Hong Kong 2,001,500 7,606,681
Iberdrola SA................................................ Spain 85,000 1,118,641
*Kohinoor Energy Ltd........................................ Pakistan 1,467,000 531,715
</TABLE>
TA-10
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS (CONT.)
Korea Electric Power Corp................................... South Korea 196,000 $ 1,809,676
Pinnacle West Capital Corp.................................. United States 40,000 1,695,000
------------
34,108,046
------------
TOTAL COMMON STOCKS
(COST $420,301,399)................................. 551,927,835
------------
PREFERRED STOCKS 5.4%
Banco Bradesco SA, pfd...................................... Brazil 767,000,000 7,559,697
*Banco Bradesco SA, pfd., rts............................... Brazil 32,793,217 117,533
Cia Energetica de Minas Gerais, pfd......................... Brazil 12,676,000 550,745
News Corp. Ltd., pfd........................................ Australia 850,000 4,206,983
News Corp. Ltd., pfd., ADR.................................. Australia 80,000 1,590,000
Petrobras-Petroleo Brasileiro SA, pfd....................... Brazil 36,000,000 8,418,978
Santander Finance Ltd., B, pfd.............................. Spain 91,500 2,321,812
Telecomunicacoes Brasileiras SA, pfd........................ Brazil 40,981,336 4,674,454
Telecomunicacoes Brasileiras SA, pfd., ADR.................. Brazil 45,600 5,309,550
Vale do Rio Doce, pfd., ADR................................. Brazil 278,500 5,602,191
------------
TOTAL PREFERRED STOCKS
(COST $28,323,979).................................. 40,351,943
------------
PRINCIPAL
AMOUNT**
------------
BONDS 17.9%
Brazil Govt., 8.875%, 11/05/01.............................. Brazil $ 2,675,000 2,678,477
Buoni Poliennali Del Tes:
10.50%, 7/15/00........................................... Italy 13,895,000,000ITL 8,854,626
10.00%, 8/01/03........................................... Italy 5,255,000,000ITL 3,624,138
Federal Republic of Germany:
Bundesobl 110, 5.375%, 2/22/99............................ Germany 4,180,000DEM 2,360,922
Unity, 8.75%, 8/20/01..................................... Germany 8,155,000DEM 5,144,132
Government of Australia, 10.00%, 10/15/02................... Australia 8,999,000AUD 6,903,605
Government of Brazil, 10.125%, 5/15/27...................... Brazil 1,820,000 1,709,890
Government of Canada:
10.50%, 7/01/00........................................... Canada 3,654,000CAD 2,862,485
10.50%, 3/01/01........................................... Canada 3,648,000CAD 2,928,381
10.00%, 5/01/02........................................... Canada 8,145,000CAD 6,691,148
Government of Denmark, 8.00%, 5/15/03....................... Denmark 18,210,000DKK 3,000,761
Government of Germany, 5.25%, 2/21/01....................... Germany 16,775,000DEM 9,522,307
Government of New Zealand, 6.50%, 2/15/00................... New Zealand 6,180,000NZD 3,513,581
Government of Spain:
12.25%, 3/25/00........................................... Spain 1,151,040,000ESP 8,739,895
10.90%, 8/30/03........................................... Spain 208,000,000ESP 1,739,909
Kingdom of Denmark, 9.00%, 11/15/00......................... Denmark 70,000DKK 11,333
Kingdom of Sweden:
13.00%, 6/15/01........................................... Sweden 18,700,000SEK 2,891,577
10.25%, 5/05/03........................................... Sweden 40,900,000SEK 6,207,349
Republic of Argentina:
10.95%, 11/01/99.......................................... Argentina 1,025,000 1,069,844
8.75%, 5/09/02............................................ Argentina 5,415,000 5,155,080
11.00%, 10/09/06.......................................... Argentina 550,000 592,625
11.375%, 1/30/17.......................................... Argentina 480,000 525,600
9.75%, 9/19/27............................................ Argentina 989,000 950,429
Republic of Brazil, 8.00%, 4/15/14.......................... Brazil 10,359,275 8,215,409
Republic Of Panama, 8.875%, 9/30/27......................... Panama 960,000 904,800
Republic of Venezuela, 144A, 9.125%, 6/18/07................ Venezuela 1,540,000 1,513,050
U.S. Treasury Notes:
6.375%, 8/15/02........................................... United States 2,890,000 2,965,865
7.25%, 8/15/04............................................ United States 4,421,000 4,780,211
6.125%, 8/15/07........................................... United States 2,300,000 2,364,690
6.125%, 11/15/27.......................................... United States 3,585,000 3,684,710
</TABLE>
TA- 11
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C>
BONDS (CONT.)
United Kingdom:
8.00%, 12/07/00........................................... United Kingdom 3,460,000GBP $ 5,870,800
stk., 7.00%, 11/06/01..................................... United Kingdom 1,125,000GBP 1,873,637
United Mexican States:
11.375%, 9/15/16.......................................... Mexico 800,000 921,000
6.25%, 12/31/19........................................... Mexico 5,050,000 4,223,063
9.75%, 2/06/01............................................ Mexico 2,895,000 3,018,038
9.875%, 1/15/07........................................... Mexico 2,940,000 3,075,975
Venezuela, Republic of, 9.25%, 9/15/27...................... Venezuela 2,384,000 2,142,620
-------------
TOTAL BONDS
(COST $136,423,416)................................. 133,231,962
-------------
SHORT TERM INVESTMENTS .7%
Federal Farm Credit Banks, 5.62%, 4/01/98................... United States 3,000,000 2,999,379
Federal Home Loan Mortgage Corp.,
5.68%, 1/22/98............................................ United States 2,000,000 1,993,722
-------------
TOTAL SHORT TERM INVESTMENTS
(COST $4,999,685)................................... 4,993,101
-------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT
(COST $590,048,479)................................. 730,504,841
-------------
(a)Repurchase Agreement 1.5%
Lehman Brothers Inc., 6.30%, 1/02/98, (Maturity Value
$11,599,058) (COST $11,595,000)
Collateral: U.S. Treasury Bill............................ United States 11,595,000 11,595,000
-------------
TOTAL INVESTMENTS (COST $601,643,479) 99.6%.......... 742,099,841
OTHER ASSETS, LESS LIABILITIES 0.3%.................. 2,352,710
NET EQUITY IN FORWARD CONTRACTS 0.1%................. 780,667
-------------
TOTAL NET ASSETS 100.0%.............................. $ 745,233,218
=============
</TABLE>
*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS, UNLESS OTHERWISE INDICATED.
(a)AT DECEMBER 31, 1997, ALL REPURCHASE AGREEMENTS HELD BY THE FUND HAD BEEN
ENTERED INTO ON THAT DATE.
<TABLE>
<CAPTION>
CURRENCY ABBREVIATIONS:
<S> <C> <C>
AUD -- Australian Dollar
CAD -- Canadian Dollar
DEM -- German Mark
DKK -- Danish Krone
ESP -- Spanish Peseta
GBP -- British Pound
ITL -- Italian Lira
NZD -- New Zealand Dollar
SEK -- Swedish Krone
</TABLE>
See Notes to Financial Statements.
TA-12
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(cost $590,048,479) $730,504,841
Repurchase agreement, at value and
cost 11,595,000
Cash 111,280
Receivables:
Investment securities sold 10,825,965
Fund shares sold 580,613
Dividends and interest 5,364,381
Unrealized gain on forward exchange
contracts (Note 6) 1,063,933
------------
Total assets 760,046,013
------------
Liabilities:
Payables:
Investment securities purchased 13,752,497
Fund shares redeemed 68,434
To affiliates 441,681
Unrealized loss on forward exchange
contracts (Note 6) 283,266
Other liabilities 266,917
------------
Total liabilities 14,812,795
------------
Net assets, at value $745,233,218
============
Net assets consist of:
Undistributed net investment income $ 21,482,994
Net unrealized appreciation 141,128,517
Accumulated net realized gain 20,966,644
Beneficial shares 561,655,063
------------
Net assets, at value $745,233,218
============
Class 1:
Net asset value per share
($735,568,425 / 32,908,712
shares outstanding) $ 22.35
============
Class 2:
Net asset value per share
($9,664,793 / 433,110 shares
outstanding) $ 22.32
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of
$1,221,988)
Dividends $14,542,873
Interest 13,020,529
-----------
Total investment income $27,563,402
Expenses:
Management fees (Note 3) 3,834,087
Administrative fees (Note 3) 667,977
Distribution fees (Note 3)
Class 2 8,750
Custodian fees 173,176
Reports to shareholders 262,550
Professional fees (Note 3) 40,824
Trustees' fees and expenses 19,500
Other 11,050
-----------
Total expenses 5,017,914
------------
Net investment income 22,545,488
------------
Realized and unrealized gains:
Net realized gain from:
Investments 18,676,311
Foreign currency transactions 2,228,155
-----------
Net realized gain 20,904,466
Net unrealized appreciation on:
Investments 44,745,539
Translation of assets and
liabilities denominated in
foreign currencies 338,911
-----------
Net unrealized
appreciation 45,084,450
------------
Net realized and unrealized gain 65,988,916
------------
Net increase in net assets
resulting from operations $88,534,404
============
</TABLE>
See Notes to Financial Statements.
TA-13
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................................ $ 22,545,488 $ 16,999,366
Net realized gain from investments and foreign currency transactions............. 20,904,466 31,832,122
Net unrealized appreciation on investments and translation of assets and
liabilities denominated in foreign currencies.................................. 45,084,450 35,269,338
-----------------------------
Net increase in net assets resulting from operations.......................... 88,534,404 84,100,826
-----------------------------
Distributions to shareholders from:
Net investment income
Class 1......................................................................... (17,068,780) (12,811,622)
Net realized gains
Class 1......................................................................... (32,390,362) (10,050,497)
Fund share transactions (Note 2):
Class 1......................................................................... 140,290,555 88,665,489
Class 2......................................................................... 9,840,237 --
-----------------------------
Net increase in net assets.................................................... 189,206,054 149,904,196
-----------------------------
Net assets:
Beginning of year................................................................. 556,027,164 406,122,968
-----------------------------
End of year....................................................................... $745,233,218 $556,027,164
=============================
Undistributed net investment income included in net assets:
End of year....................................................................... $ 21,482,994 $ 16,968,534
=============================
</TABLE>
See Notes to Financial Statements.
TA-14
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Asset Allocation Fund (the Fund) is a separate, diversified series of
Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The 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 following summarizes the Fund's
significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the funds comprising
the Trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
TA-15
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. INDEXED SECURITIES:
The Fund may invest in debt instruments in which the principal and/or interest
is dependent on other factors such as yield curves, currency exchange rates or
commodity prices. The Fund's objective in holding these securities, commonly
called indexed securities or structured notes, is to tailor the Fund's
investments to the specific risk and returns it wishes to assume while avoiding
unwanted risk or change in the Fund's exposure to a particular foreign exchange
rate or the spread between two foreign exchange rates.
f. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. BENEFICIAL SHARES
The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold...................................................... 5,703,031 $125,783,146 5,028,891 $ 96,250,257
Shares issued on reinvestment of distributions................... 2,407,943 49,459,142 1,240,484 22,862,120
Shares redeemed.................................................. (1,580,128) (34,951,733) (1,580,553) (30,446,888)
---------------------------------------------------------------
Net increase..................................................... 6,530,846 $140,290,555 4,688,822 $ 88,665,489
===============================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997*
----------------------
SHARES AMOUNT
---------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold...................................................... 453,139 $10,300,271
Shares redeemed.................................................. (20,029) (460,034)
---------------------------
Net increase..................................................... 433,110 $ 9,840,237
===========================
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>
TA-16
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Templeton Funds Annuity Company (TFAC) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.
Effective May 1, 1997, the Fund pays an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.65% First $200 million
0.585% Over $200 million, up to and including $1.3 billion
0.52% Over $1.3 billion
</TABLE>
Prior to May 1, 1997, the Fund paid an investment management fee to TICI based
on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
The Fund pays its allocated share of an administrative fee to TFAC based on the
Trust's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.
Included in professional fees are legal fees of $12,694 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation.................................................................... $173,346,461
Unrealized depreciation.................................................................... (32,890,099)
============
Net unrealized appreciation................................................................ $140,456,362
============
</TABLE>
TA-17
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $445,239,838 and $295,000,116, respectively.
6. OFF-BALANCE SHEET RISK
The fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the 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 day of entry into the contract.
As of December 31, 1997, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ----------------------------------------------------------------------------
---------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
1,752,000 New Zealand Dollars............................................ U.S. $ 1,082,386 1/12/98 U.S. $ 66,197
17,840,000 German Marks................................................... 10,124,284 1/16/98 197,982
1,650,000 Australian Dollars............................................. 1,084,710 1/20/98 8,827
3,625,000 German Marks................................................... 2,048,048 1/20/98 30,578
7,250,000 German Marks................................................... 4,066,181 1/21/98 30,998
1,238,000 Australian Dollars............................................. 808,179 1/21/98 922
3,625,000 German Marks................................................... 2,053,185 1/21/98 35,593
876,000 New Zealand Dollars............................................ 511,409 1/22/98 3,776
825,000 Australian Dollars............................................. 545,655 1/22/98 7,688
7,250,000 German Marks................................................... 4,096,045 1/23/98 60,370
7,000,000 Australian Dollars............................................. 4,823,000 1/30/98 257,594
1,755,000 New Zealand Dollars............................................ 1,040,715 2/17/98 25,627
----------- -----------
U.S. $32,283,797 726,152
===========
Net unrealized gain on offsetting forward exchange contracts... 337,781
-----------
Unrealized gain on forward exchange contracts.................. 1,063,933
-----------
CONTRACTS TO BUY:
- ----------------------------------------------------------------------------
1,650,000 Australian Dollars............................................. U.S. $ 1,095,188 1/30/98 (19,056)
===========
CONTRACTS TO SELL:
- ----------------------------------------------------------------------------
876,000 New Zealand Dollars............................................ U.S. $ 504,620 1/21/98 (3,059)
===========
Net unrealized loss on offsetting forward exchange contracts... (261,151)
-----------
Unrealized loss on forward exchange contracts................ (283,266)
-----------
Net unrealized gain on forward exchange contracts.......... U.S. $ 780,667
===========
</TABLE>
TA-18
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Templeton Asset Allocation Fund, series of
Templeton Variable Products Series Fund (the Trust) as of December 31, 1997, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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 the
Templeton Asset Allocation Fund, series of Templeton Variable Products Series
Fund as of December 31, 1997, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998
TA-19
<PAGE>
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
5.34% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
TA-20
<PAGE>
[LOGO](tm)
FRANKLIN TEMPLETON
100 Fountain Parkway
St. Petersburg, Florida 33716-1205
TEMPLETON VARIABLE PRODUCTS SERIES FUND
INVESTMENT MANAGERS
Templeton Investment Counsel, Inc. ("TICI")
Templeton Asset Management Ltd., Singapore
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
Templeton Variable Products Series Fund Shares are currently sold only to
insurance Company Separate Accounts ("Separate Accounts") to serve as the
investment vehicles for both Variable Annuity and Variable Life Insurance
contracts (the "Contracts"). This report must be preceded or accompanied by the
current prospectus for the applicable contract, which includes the Separate
Account and the Templeton Variable Product Series Fund prospectuses, which
contain more detailed information, including sales charges, risks and
advantages. Please read the prospectuses carefully before investing or sending
money. These reports and prospectuses do not constitute an offering in any
jurisdiction in which such offering may not lawfully be made.
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.
[LOGO] Printed on recycled paper
<PAGE>
[FRANKLIN TEMPLETON LOGO]
100 Fountain Parkway
St. Petersburg, Florida 33716-1205
TEMPLETON VARIABLE PRODUCTS SERIES FUND
INVESTMENT MANAGERS
Templeton Investment Counsel, Inc. ("TICI")
Templeton Asset Management Ltd., Singapore
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
Templeton Variable Products Series Fund Shares are currently sold only to
Insurance Company Separate Accounts ("Separate Accounts") to serve as the
investment vehicles for both Variable Annuity and Variable Life Insurance
contracts (the "Contracts"). This report must be preceded or accompanied by the
current prospectus for the applicable contract, which includes the Separate
Account and the Templeton Variable Product Series Fund prospectuses, which
contain more detailed information, including sales charges, risks and
advantages. Please read the prospectuses carefully before investing or sending
money. These reports and prospectuses do not constitute an offering in any
jurisdiction in which such offering may not lawfully be made.
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.
OL 2510 A [RECYCLE SIGN] Printed on recycled paper
<PAGE>
