AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON July 16, 1999.
File Nos.
33-20313
811-5479
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 24 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27
TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FLORIDA 33396-3091
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954)527-7500
BARBARA J. GREEN, 500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE,
FLORIDA 33396-3091
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on [] pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on October 1, 1999 pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PROSPECTUS
FRANKLIN S&P 500
INDEX FUND-CLASS 1
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
OCTOBER 1, 1999
[Insert Franklin Templeton Logo]
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
CONTENTS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
INDIVIDUAL FUND DESCRIPTIONS
Franklin S&P 500 Index Fund
[insert page #] Overview
Additional Information, All Funds
[insert page #] Important Recent Developments
[insert page #] Distributions and Taxes
FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Buying Shares
[insert page #] Selling Shares
[insert page #] Exchanging Shares
[insert page #] Fund Account Policies
[insert page #] Questions
For More Information
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
Franklin S&P 500 Index Fund
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund uses an
investment "indexing" strategy designed to track the performance of the S&P 500
Index. The S&P 500 Index is a widely recognized, unmanaged stock market index,
which is dominated by the securities of large U.S. companies. The index includes
the securities of 500 companies from several industrial sectors which represent
a significant portion of the market value of all common stocks publicly traded
in the U.S. The index weights stocks according to their market capitalization
(the number of common stock shares outstanding multiplied by the stock's current
price). Standard & Poor's Corporation determines the composition of the S&P 500
Index and may change the composition from time to time.
[Begin callout]
This index fund invests to match the performance of the S&P 500 Index.
[End callout]
The fund may invest in the common stocks in the S&P 500 Index in approximately
the same proportions as the S&P 500 Index. For example, if one company's
securities made up 5% of the S&P 500 Index, the fund may invest 5% of its total
assets in that company. This is called the "replication" method. Over time, the
fund will seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest in a sample
of stocks found in the S&P 500 Index, selected on the basis of
computer-generated statistical data to resemble the full index in terms of
industry weighting, market capitalization, and other characteristics such as
beta, price-to-book ratios, price-to-earnings ratios and dividend yield. This is
called the "optimization" method. Stocks represent ownership interests in
individual companies and give shareholders a claim in the company's earnings and
assets.
When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative securities,
such as stock index futures and stock index options, as a method of gaining
market exposure in addition to or instead of investing in securities in the S&P
500 Index. In such a circumstance, all or substantially all of the fund's assets
may be invested in derivative securities and short-term debt securities. Such
short-term debt securities may include U.S. government securities, certificates
of deposit, high-grade commercial paper, repurchase agreements, and other money
market equivalents, and the shares of money market funds managed by the manager
that invest primarily in short-term debt securities.
Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing directly
in the underlying securities. The fund may also invest in derivative securities
to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. The fund will not use derivative
securities for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment.
PORTFOLIO SELECTION The manager uses various "indexing" strategies designed to
track the performance of the S&P 500 Index and does not seek to outperform the
market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash flows
into and out of the fund.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole. Large-capitalization stocks
tend to go through cycles of doing better -- or worse -- than the stock market
in general. In the past, these periods have lasted for several years.
[Begin callout] Because the stocks the fund holds fluctuate in price with market
conditions, the value of your investment in the fund will go up and down. This
means you could lose money over short or even extended periods.
[End callout]
INDEX TRACKING The fund's ability to track the S&P 500 Index may be affected by
transaction costs and fund expenses, cash flows, and changes in the composition
of the index. In addition, the fund's performance may not precisely track the
performance of the S&P 500 Index if the securities the manager has selected do
not precisely track the index. If securities the fund owns underperforms those
in the index, the fund's performance will be lower than the index. Unlike an
unmanaged index, the fund pays operating expenses that may prevent the fund from
precisely tracking the index's performance. Cash inflows from investors buying
shares could create large balances of cash, while cash outflows from investors
selling shares may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested" index.
DERIVATIVE SECURITIES Stock index futures and stock index options are considered
derivative investments, since their value depends on the value of the underlying
asset to be purchased or sold. The fund's investment in derivatives may involve
a small investment relative to the amount of risk assumed. To the extent the
fund enters into these transactions, their success will depend on the manager's
ability to predict market movements. The fund could suffer losses if its
derivative securities do not correlate well with the indexes or securities for
which they are acting as a substitute or if the fund cannot close out a position
because the trading markets become illiquid.
CREDIT There is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect a debt security's value and, thus, impact the value of the fund's shares.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities prices can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the Statement of Additional Information.
[Insert graphic of bull and bear] PAST PERFORMANCE
Because the fund started on October 1, 1999, performance for a full calendar
year is not yet available.
[insert graphic of percentage sign] FEES AND EXPENSES
Franklin S&P 500 Index Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's estimated expenses for the current
fiscal year. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY FEES OR SALES CHARGES
IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT
OPTION. If they were included, your costs would be higher. Investors should
consult the contract prospectus or disclosure document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
Maximum sales charge (load) as a percentage
of offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 1
Management fees X.XX%
Distribution and service (12b-1) fees 0.00%
Other expenses 0.XX%
Total annual fund operating expenses X.XX%
Fee waiver/expense reductions (X.XX%)
Net expenses X.XX%
1. The manager agreed in advance to limit management fees and assume certain
other fund expenses as necessary so that Total Fund Operating Expenses do not
exceed X.XX% of the fund's class 1 net assets during the current fiscal year.
The manager is contractually obligated to continue this arrangement through
[2000].
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for the
periods shown and then sell all of your shares at the end of those periods. The
example also assumes your investment has a 5% return each year and the fund's
operating expenses are BEFORE WAIVER as shown above and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Class 1 $ $ $ $
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California, 94403-7777, is the fund's investment manager.
Portfolio Manager.
Mark Boyadjian, Portfolio Manager of Advisers
Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Philosophy from University of California at Berkeley. Prior to joining
the Franklin Templeton Group in 1998, Mr. Boyadjian was a portfolio manager at
Scudder, Stevens & Clark.
Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts, 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of [X.XX]% of the
fund's average net assets. The manager agreed in advance to limit management
fees and assume certain other fund expenses as necessary so that Total Fund
Operating Expenses will not exceed [X.XX%] of the fund's class 1 net assets
during the current fiscal year. The manager is contractually obligated to
continue this arrangement through [ ].
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500", and "500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
Franklin Templeton Distributors, Inc. The fund is not sponsored, endorsed, sold
or promoted by Standard and Poor's and Standard and Poor's makes no
representation regarding the advisability of investing in the fund. Please see
the SAI for additional information.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
[Insert graphic of pyramid] OVERVIEW
Templeton Variable Products Series Fund (the Trust) currently consists of ten
separate funds, offering a wide variety of investment choices. Each fund has two
classes of shares, class 1 and class 2, except Franklin S&P 500 Index Fund which
has three classes of shares, class 1, class 2 and class 3. The funds are only
available as investment options in variable annuity or variable life insurance
contracts, except Franklin S&P 500 Index Fund which is also offered as an
investment option to defined contribution plans participating in Franklin
Templeton ValuSelect(R). The accompanying contract prospectus, or other
disclosure document, indicates which funds and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally, the
higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider diversifying
your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up and
down, sometimes dramatically, and mixed with the good years can be some bad
years. Since no one can predict exactly how financial markets will perform, you
may want to exercise patience and focus not on short-term market movements, but
on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment goal.
o Because you could lose money by investing in a fund, take the time to read
each fund description and consider all risks before investing.
o Fund shares are not deposits or obligations of, or guaranteed or endorsed by,
any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
Government. Fund shares involve investment risks, including the possible loss of
principal.
MORE DETAILED INFORMATION ABOUT EACH FUND ITS INVESTMENT POLICIES, AND ITS
PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION
(SAI).
MANAGEMENT
Franklin Advisers, Inc. and its affiliates manage over $223 billion in assets.
Franklin Templeton is one of the largest mutual fund organizations in the United
States, and for over 50 years has offered money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader in
managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the Franklin Templeton
organization four years later.
Additional Information, All Funds
[insert graphic of a starburst] IMPORTANT RECENT DEVELOPMENTS
o YEAR 2000 PROBLEM The funds' business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by their managers, their service providers and other
third parties they do business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including securities
trade processing, interest and dividend payments, securities pricing,
shareholder account services, reporting, custody functions and others. The funds
could experience difficulties in effecting transactions if any of their foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year 2000
readiness. Issuers in countries outside of the U.S., particularly in emerging
markets, may be more susceptible to Year 2000 problems and may not be required
to make the same level of disclosure regarding Year 2000 readiness as is
required in the U.S. The managers, of course, cannot audit any company or their
major suppliers to verify their Year 2000 readiness. If a company in which any
fund is invested is adversely affected by Year 2000 problems, it is likely that
the price of its security will also be adversely affected. A decrease in the
value of one or more of a fund's portfolio holdings will have a similar impact
on the price of the fund's shares.
The managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the funds' ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the funds and their managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on the business or financial condition of
European issuers which the funds may hold in their portfolios, and their impact
on fund performance. To the extent a fund holds non-U.S. dollar (euro or other)
denominated securities, it will still be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus or disclosure document.
FUND ACCOUNT INFORMATION
[Insert graphic of paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. Shares of Franklin S&P 500 Index Fund are also sold at NAV to defined
contribution plans participating in Franklin ValuSelect to serve as an
investment option for plan participants. The funds' Board monitors this to be
sure there are no material conflicts of interest between the two different types
of contract owners and/or plan participants. If there were, the Board would take
corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
[Insert graphic of certificate] SELLING SHARES
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under the
terms of its contracts. Requests to sell shares are processed at the NAV next
calculated after we receive the request in proper form.
[Insert graphic of two arrows] EXCHANGING SHARES
Contract owners may exchange shares of any one class or fund for shares of other
classes or funds through a transfer between investment options available under a
variable insurance contract, subject to the terms, and any specific limitations
on the exchange (or "transfer") privilege, described in the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of exchanges that may be made (please see "Market Timers," below).
[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class's NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of the shares may change
on days that the insurance company separate account cannot buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper form.
REPORTS Insurance company shareholders will receive the fund's financial reports
every six months. If you need additional copies, please call 1-800/774- 5001.
MARKET TIMERS The funds are not designed for market timers, large or frequent
transfers. The funds may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or
(ii) exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to make
payments in securities or other assets of a fund, in the case of an emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2, except
Franklin S&P 500 Index Fund which has three classes of shares, class 1, class 2
and class 3. Each class is identical except that class 2 and class 3 each has a
distribution plan or "Rule 12b-1 Plan" which is described in prospectuses
offering class 2 and class 3 shares.
[Insert graphic of question mark] QUESTIONS
More detailed information about the Trust and the funds' account policies can be
found in the funds' Statement of Additional Information (SAI). If you have any
questions about the funds, you can write to us at 100 Fountain Parkway, St.
Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your protection and
to help ensure we provide you with quality service, all calls may be monitored
or recorded.
FOR MORE INFORMATION
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life insurance
contracts, except Franklin S&P 500 Index Fund which is also available as an
investment option to defined contribution plans participating in Franklin
Templeton ValuSelect. Please consult the accompanying contract prospectus or
disclosure document for information about the terms of an investment in a
contract.
You can learn more about the funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed
performance information, fund holdings, and the auditor's report (Annual Report
only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin/registered trademark/Templeton/registered trademark/ 1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file 811-5479
PROSPECTUS
FRANKLIN S&P 500
INDEX FUND-CLASS 2
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
OCTOBER 1, 1999
[Insert Franklin Templeton Logo]
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
CONTENTS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
INDIVIDUAL FUND DESCRIPTIONS
Franklin S&P 500 Index Fund
[insert page #] Overview
Additional Information, All Funds
[insert page #] Important Recent Developments
[insert page #] Distributions and Taxes
FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Buying Shares
[insert page #] Selling Shares
[insert page #] Exchanging Shares
[insert page #] Fund Account Policies
[insert page #] Questions
For More Information
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
Franklin S&P 500 Index Fund
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund uses an
investment "indexing" strategy designed to track the performance of the S&P 500
Index. The S&P 500 Index is a widely recognized, unmanaged stock market index,
which is dominated by the securities of large U.S. companies. The index includes
the securities of 500 companies from several industrial sectors which represent
a significant portion of the market value of all common stocks publicly traded
in the U.S. The index weights stocks according to their market capitalization
(the number of common stock shares outstanding multiplied by the stock's current
price). Standard & Poor's Corporation determines the composition of the S&P 500
Index and may change the composition from time to time.
[Begin callout]
This index fund invests to match the performance of the S&P 500 Index.
[End callout]
The fund may invest in the common stocks in the S&P 500 Index in approximately
the same proportions as the S&P 500 Index. For example, if one company's
securities made up 5% of the S&P 500 Index, the fund may invest 5% of its total
assets in that company. This is called the "replication" method. Over time, the
fund will seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest in a sample
of stocks found in the S&P 500 Index, selected on the basis of
computer-generated statistical data to resemble the full index in terms of
industry weighting, market capitalization, and other characteristics such as
beta, price-to-book ratios, price-to-earnings ratios and dividend yield. This is
called the "optimization" method. Stocks represent ownership interests in
individual companies and give shareholders a claim in the company's earnings and
assets.
When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative securities,
such as stock index futures and stock index options, as a method of gaining
market exposure in addition to or instead of investing in securities in the S&P
500 Index. In such a circumstance, all or substantially all of the fund's assets
may be invested in derivative securities and short-term debt securities. Such
short-term debt securities may include U.S. government securities, certificates
of deposit, high-grade commercial paper, repurchase agreements, and other money
market equivalents, and the shares of money market funds managed by the manager
that invest primarily in short-term debt securities.
Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing directly
in the underlying securities. The fund may also invest in derivative securities
to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. The fund will not use derivative
securities for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment.
PORTFOLIO SELECTION The manager uses various "indexing" strategies designed to
track the performance of the S&P 500 Index and does not seek to outperform the
market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash flows
into and out of the fund.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole. Large-capitalization stocks
tend to go through cycles of doing better -- or worse -- than the stock market
in general. In the past, these periods have lasted for several years.
[Begin callout] Because the stocks the fund holds fluctuate in price with market
conditions, the value of your investment in the fund will go up and down. This
means you could lose money over short or even extended periods.
[End callout]
INDEX TRACKING The fund's ability to track the S&P 500 Index may be affected by
transaction costs and fund expenses, cash flows, and changes in the composition
of the index. In addition, the fund's performance may not precisely track the
performance of the S&P 500 Index if the securities the manager has selected do
not precisely track the index. If securities the fund owns underperforms those
in the index, the fund's performance will be lower than the index. Unlike an
unmanaged index, the fund pays operating expenses that may prevent the fund from
precisely tracking the index's performance. Cash inflows from investors buying
shares could create large balances of cash, while cash outflows from investors
selling shares may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested" index.
DERIVATIVE SECURITIES Stock index futures and stock index options are considered
derivative investments, since their value depends on the value of the underlying
asset to be purchased or sold. The fund's investment in derivatives may involve
a small investment relative to the amount of risk assumed. To the extent the
fund enters into these transactions, their success will depend on the manager's
ability to predict market movements. The fund could suffer losses if its
derivative securities do not correlate well with the indexes or securities for
which they are acting as a substitute or if the fund cannot close out a position
because the trading markets become illiquid.
CREDIT There is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect a debt security's value and, thus, impact the value of the fund's shares.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities prices can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the Statement of Additional Information.
[Insert graphic of bull and bear] PAST PERFORMANCE
Because the fund started on October 1, 1999, performance for a full calendar
year is not yet available.
[insert graphic of percentage sign] FEES AND EXPENSES
Franklin S&P 500 Index Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's estimated expenses for the current
fiscal year. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY FEES OR SALES CHARGES
IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT
OPTION. If they were included, your costs would be higher. Investors should
consult the contract prospectus or disclosure document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
Maximum sales charge (load) as a percentage
of offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 2
Management fees X.XX%
Distribution and service (12b-1) fees X.XX%
Other expenses X.XX%
Total annual fund operating expenses X.XX%
Fee waiver/expense reductions (X.XX%)
Net expenses X.XX%
1. The manager agreed in advance to limit management fees and assume certain
other fund expenses as necessary so that Total Fund Operating Expenses do not
exceed X.XX% of the fund's class 2 net assets during the current fiscal year.
The manager is contractually obligated to continue this arrangement through
[2000].
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for the
periods shown and then sell all of your shares at the end of those periods. The
example also assumes your investment has a 5% return each year and the fund's
operating expenses are BEFORE WAIVER as shown above and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Class 2 $ $ $ $
<PAGE>
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California, 94403-7777, is the fund's investment manager.
Portfolio Manager.
Mark Boyadjian, Portfolio Manager of Advisers
Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Philosophy from University of California at Berkeley. Prior to joining
the Franklin Templeton Group in 1998, Mr. Boyadjian was a portfolio manager at
Scudder, Stevens & Clark.
Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts, 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of [X.XX]% of the
fund's average net assets. The manager agreed in advance to limit management
fees and assume certain other fund expenses as necessary so that Total Fund
Operating Expenses will not exceed [X.XX%] of the fund's class 2 net assets
during the current fiscal year. The manager is contractually obligated to
continue this arrangement through [ ].
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500", and "500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
Franklin Templeton Distributors, Inc. The fund is not sponsored, endorsed, sold
or promoted by Standard and Poor's and Standard and Poor's makes no
representation regarding the advisability of investing in the fund. Please see
the SAI for additional information.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
[Insert graphic of pyramid] OVERVIEW
Templeton Variable Products Series Fund (the Trust) currently consists of ten
separate funds, offering a wide variety of investment choices. Each fund has two
classes of shares, class 1 and class 2, except Franklin S&P 500 Index Fund which
has three classes of shares, class 1, class 2 and class 3. The funds are only
available as investment options in variable annuity or variable life insurance
contracts, except Franklin S&P 500 Index Fund which is also offered as an
investment option to defined contribution plans participating in Franklin
Templeton ValuSelect(R). The accompanying contract prospectus, or other
disclosure document, indicates which funds and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider
diversifying your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up
and down, sometimes dramatically, and mixed with the good years can be some bad
years. Since no one can predict exactly how financial markets will perform, you
may want to exercise patience and focus not on short-term market movements, but
on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment goal.
o Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
o Fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
Government. Fund shares involve investment risks, including the possible loss of
principal.
MORE DETAILED INFORMATION ABOUT EACH FUND ITS INVESTMENT POLICIES, AND ITS
PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION
(SAI).
MANAGEMENT
Franklin Advisers, Inc. and its affiliates manage over $223 billion in assets.
Franklin Templeton is one of the largest mutual fund organizations in the United
States, and for over 50 years has offered money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader in
managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the Franklin Templeton
organization four years later.
Additional Information, All Funds
[insert graphic of a starburst] IMPORTANT RECENT DEVELOPMENTS
o YEAR 2000 PROBLEM The funds' business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by their managers, their service providers and other
third parties they do business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including securities
trade processing, interest and dividend payments, securities pricing,
shareholder account services, reporting, custody functions and others. The funds
could experience difficulties in effecting transactions if any of their foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year 2000
readiness. Issuers in countries outside of the U.S., particularly in emerging
markets, may be more susceptible to Year 2000 problems and may not be required
to make the same level of disclosure regarding Year 2000 readiness as is
required in the U.S. The managers, of course, cannot audit any company or their
major suppliers to verify their Year 2000 readiness. If a company in which any
fund is invested is adversely affected by Year 2000 problems, it is likely that
the price of its security will also be adversely affected. A decrease in the
value of one or more of a fund's portfolio holdings will have a similar impact
on the price of the fund's shares.
The managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the funds' ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the funds and their managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on the business or financial condition of
European issuers which the funds may hold in their portfolios, and their impact
on fund performance. To the extent a fund holds non-U.S. dollar (euro or other)
denominated securities, it will still be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus or disclosure document.
FUND ACCOUNT INFORMATION
[Insert graphic of paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. Shares of Franklin S&P 500 Index Fund are also sold at NAV to defined
contribution plans participating in Franklin ValuSelect to serve as an
investment option for plan participants. The funds' Board monitors this to be
sure there are no material conflicts of interest between the two different types
of contract owners and/or plan participants. If there were, the Board would take
corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
[Insert graphic of certificate] SELLING SHARES
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under the
terms of its contracts. Requests to sell shares are processed at the NAV next
calculated after we receive the request in proper form.
[Insert graphic of two arrows] EXCHANGING SHARES
Contract owners may exchange shares of any one class or fund for shares of other
classes or funds through a transfer between investment options available under a
variable insurance contract, subject to the terms, and any specific limitations
on the exchange (or "transfer") privilege, described in the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of exchanges that may be made (please see "Market Timers," below).
[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class's NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of the shares may change
on days that the insurance company separate account cannot buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper form.
REPORTS Insurance company shareholders will receive the fund's financial reports
every six months. If you need additional copies, please call 1-800/774- 5001.
MARKET TIMERS The funds are not designed for market timers, large or frequent
transfers. The funds may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or
(ii) exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to make
payments in securities or other assets of a fund, in the case of an emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2, except
Franklin S&P 500 Index Fund which has three classes of shares, class 1, class 2
and class 3. Each class is identical except that class 2 and class 3 each has a
distribution plan or "Rule 12b-1 Plan" which is described in prospectuses
offering class 2 and class 3 shares.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 and class 3 each has a
distribution plan, sometimes known as a rule 12b-1 plan, that allows the funds
to pay distribution fees of up to 0.25% per year (up to 0.15% for the Bond Fund)
to those who sell and distribute class 2 and class 3 shares and provide services
to shareholders and contract owners. Because these fees are paid out of class
2's and class 3's assets, respectively, on an on-going basis, over time these
fees will increase the cost of an investment, and may cost more than paying
other types of sales charges.
[Insert graphic of question mark] QUESTIONS
More detailed information about the Trust and the funds' account policies can be
found in the funds' Statement of Additional Information (SAI). If you have any
questions about the funds, you can write to us at 100 Fountain Parkway, St.
Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your protection and
to help ensure we provide you with quality service, all calls may be monitored
or recorded.
FOR MORE INFORMATION
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life insurance
contracts, except Franklin S&P 500 Index Fund which is also available as an
investment option to defined contribution plans participating in Franklin
Templeton ValuSelect. Please consult the accompanying contract prospectus or
disclosure document for information about the terms of an investment in a
contract.
You can learn more about the funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and the
auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin/registered trademark/Templeton/registered trademark/ 1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file 811-5479
PROSPECTUS
FRANKLIN S&P 500
INDEX FUND-CLASS 3
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
OCTOBER 1, 1999
[Insert Franklin Templeton Logo]
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
CONTENTS
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
THE FUND
[insert page #] Overview of the Trust
Additional Information
[insert page #] Important Recent Developments
[insert page #] Distributions and Taxes
FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Buying Shares
[insert page #] Selling Shares
[insert page #] Exchanging Shares
[insert page #] Fund Account Policies
[insert page #] Questions
For More Information
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction
of fund expenses.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund uses an
investment "indexing" strategy designed to track the performance of the S&P
500 Index. The S&P 500 Index is a widely recognized, unmanaged stock market
index, which is dominated by the securities of large U.S. companies. The
index includes the securities of 500 companies from several industrial
sectors which represent a significant portion of the market value of all
common stocks publicly traded in the U.S. The index weights stocks according
to their market capitalization (the number of common stock shares outstanding
multiplied by the stock's current price). Standard & Poor's Corporation
determines the composition of the S&P 500 Index and may change the
composition from time to time.
[Begin callout]
This index fund invests to match the performance of the S&P 500 Index.
[End callout]
The fund may invest in the common stocks in the S&P 500 Index in
approximately the same proportions as the S&P 500 Index. For example, if one
company's securities made up 5% of the S&P 500 Index, the fund may invest 5%
of its total assets in that company. This is called the "replication" method.
Over time, the fund will seek to invest at least 80% of its total assets in
the common stocks of companies included in the S&P 500 Index. The fund may
also invest in a sample of stocks found in the S&P 500 Index, selected on the
basis of computer-generated statistical data to resemble the full index in
terms of industry weighting, market capitalization, and other characteristics
such as beta, price-to-book ratios, price-to-earnings ratios and dividend
yield. This is called the "optimization" method. Stocks represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets.
When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative
securities, such as stock index futures and stock index options, as a method
of gaining market exposure in addition to or instead of investing in
securities in the S&P 500 Index. In such a circumstance, all or substantially
all of the fund's assets may be invested in derivative securities and
short-term debt securities. Such short-term debt securities may include U.S.
government securities, certificates of deposit, high-grade commercial paper,
repurchase agreements, and other money market equivalents, and the shares of
money market funds managed by the manager that invest primarily in short-term
debt securities.
Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing
directly in the underlying securities. The fund may also invest in derivative
securities to keep cash on hand to meet shareholder redemptions or other
needs while maintaining exposure to the stock market. The fund will not use
derivative securities for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment.
PORTFOLIO SELECTION The manager uses various "indexing" strategies designed
to track the performance of the S&P 500 Index and does not seek to outperform
the market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash
flows into and out of the fund.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
Large-capitalization stocks tend to go through cycles of doing better -- or
worse -- than the stock market in general. In the past, these periods have
lasted for several years.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
INDEX TRACKING The fund's ability to track the S&P 500 Index may be affected
by transaction costs and fund expenses, cash flows, and changes in the
composition of the index. In addition, the fund's performance may not
precisely track the performance of the S&P 500 Index if the securities the
manager has selected do not precisely track the index. If securities the
fund owns underperforms those in the index, the fund's performance will be
lower than the index. Unlike an unmanaged index, the fund pays operating
expenses that may prevent the fund from precisely tracking the index's
performance. Cash inflows from investors buying shares could create large
balances of cash, while cash outflows from investors selling shares may
require ready reserves of cash. Either situation would likely cause the
fund's performance to deviate from the "fully invested" index.
DERIVATIVE SECURITIES Stock index futures and stock index options are
considered derivative investments, since their value depends on the value of
the underlying asset to be purchased or sold. The fund's investment in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to predict market movements. The fund
could suffer losses if its derivative securities do not correlate well with
the indexes or securities for which they are acting as a substitute or if the
fund cannot close out a position because the trading markets become illiquid.
CREDIT There is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength may affect a debt security's value and, thus, impact the value of
the fund's shares.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest
rates rise, debt securities can lose market value. Similarly, when interest
rates fall, debt securities prices can gain value. In general, securities
with longer maturities are more sensitive to these price changes.
See "Important Recent Developments" in this prospectus for a discussion of
Year 2000 and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be
found in the Statement of Additional Information.
[Insert graphic of bull and bear] PAST PERFORMANCE
Because the fund started on October 1, 1999, performance for a full calendar
year is not yet available.
[insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's estimated expenses for
the current fiscal year.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 3
Maximum sales charge (load) as a percentage
of offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 3
Management fees X.XX%
Distribution and service (12b-1) fees X.XX%
Other expenses X.XX%
Total annual fund operating expenses X.XX%
Fee waiver/expense reductions (X.XX%)
Net expenses X.XX%
1. The manager agreed in advance to limit management fees and assume certain
other fund expenses as necessary so that Total Fund Operating Expenses do not
exceed X.XX% of the fund's class 3 net assets during the current fiscal
year. The manager is contractually obligated to continue this arrangement
through [2000].
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those
periods. The example also assumes your investment has a 5% return each year
and the fund's operating expenses are BEFORE WAIVER as shown above and remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------
Class 3 $ $ $ $
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California, 94403-7777, is the fund's investment manager.
Portfolio Manager.
Mark Boyadjian, Portfolio Manager of Advisers
Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Philosophy from University of California at Berkeley. Prior to
joining the Franklin Templeton Group in 1998, Mr. Boyadjian was a portfolio
manager at Scudder, Stevens & Clark.
Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts, 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of [X.XX]% of the
fund's average net assets. The manager agreed in advance to limit management
fees and assume certain other fund expenses as necessary so that Total Fund
Operating Expenses will not exceed [X.XX%] of the fund's class 3 net assets
during the current fiscal year. The manager is contractually obligated to
continue this arrangement through [ ].
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500", and "500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by Franklin Templeton Distributors, Inc. The fund is not sponsored,
endorsed, sold or promoted by Standard and Poor's and Standard and Poor's
makes no representation regarding the advisability of investing in the fund.
Please see the SAI for additional information.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
[Insert graphic of pyramid] OVERVIEW
Templeton Variable Products Series Fund (the Trust) currently consists of ten
separate funds, offering a wide variety of investment choices. Each fund has
two classes of shares, class 1 and class 2, except Franklin S&P 500 Index
Fund which has three classes of shares, class 1, class 2 and class 3. The
funds are only available as investment options in variable annuity or
variable life insurance contracts, except Franklin S&P 500 Index Fund which
is also offered as an investment option to defined contribution plans
participating in Franklin Templeton ValuSelect(R).
INVESTMENT CONSIDERATIONS
o The fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider
diversifying your fund choices.
o You should evaluate the fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine if the fund is right for you.
o All securities markets, interest rates, and currency valuations move up
and down, sometimes dramatically, and mixed with the good years can be some
bad years. Since no one can predict exactly how financial markets will
perform, you may want to exercise patience and focus not on short-term market
movements, but on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment goal.
o Because you could lose money by investing in the fund, take the time to
read this prospectus and consider all risks before investing.
o Fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. Government. Fund shares involve investment risks, including the possible
loss of principal.
MORE DETAILED INFORMATION ABOUT THE FUND ITS INVESTMENT POLICIES, AND ITS
PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION (SAI).
MANAGEMENT
Franklin Advisers, Inc. and its affiliates manage over $223 billion in
assets. Franklin Templeton is one of the largest mutual fund organizations in
the United States, and for over 50 years has offered money management
expertise spanning a variety of investment objectives. In 1992, Franklin,
recognized as a leader in managing domestic mutual funds, joined forces with
Templeton, a pioneer in international investing. The Mutual Advisers team,
known for its value-driven approach to domestic equity investing, became part
of the Franklin Templeton organization four years later.
Additional Information
[insert graphic of a starburst] IMPORTANT RECENT DEVELOPMENTS
o YEAR 2000 PROBLEM The fund's business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly called the Year
2000 problem). In addition, the fact that the Year 2000 is a leap year may
create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by its managers, its service providers and other
third parties they do business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker/dealers or foreign
markets are not ready for Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one
of the factors that the fund's managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may be more susceptible to Year 2000 problems and may not
be required to make the same level of disclosure regarding Year 2000
readiness as is required in the U.S. The managers, of course, cannot audit
any company or their major suppliers to verify their Year 2000 readiness. If
a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares.
The managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their
Year 2000 problems. Of course, the fund's ability to reduce the effects of
the Year 2000 problem is also very much dependent upon the efforts of third
parties over which the fund and its managers may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund will declare as dividends
substantially all of its net investment income. The fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the fund will
reduce the per share net asset value (NAV) by the per share amount paid.
TAX CONSIDERATIONS Fund distributions received by your qualified retirement
plan, such as a Section 401(k) plan or profit sharing plan, are generally
tax-deferred. This means that you are not required to report fund
distributions on your income tax return when paid, but rather, when your plan
makes payments to you.
FUND ACCOUNT INFORMATION
[Insert graphic of paper with lines and someone writing] BUYING SHARES
Class 3 shares of the fund are sold at NAV to defined contribution plans
participating in Franklin ValuSelect to serve as an investment option for
plan participants. Class 1 and class 2 shares of the fund are sold at NAV to
insurance company separate accounts to serve as investment options for
variable annuity or variable life insurance contracts. The fund's Board
monitors this to be sure there are no material conflicts of interest between
the two different types of contract owners and/or plan participants. If there
were, the Board would take corrective action.
Requests to buy shares are processed at the NAV next calculated after we
receive the request in proper form. The fund does not issue share
certificates.
[Insert graphic of certificate] SELLING SHARES
Requests to sell shares are processed at the NAV next calculated after we
receive the request in proper form. A Contingent Deferred Sales Charge (CDSC)
may apply if your retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. The CDSC is 1% of
the current value of the shares being sold or their NAV when purchased,
whichever is less. There is no CDSC on shares you acquire by reinvesting
your dividends or capital gains distributions.
[Insert graphic of two arrows] EXCHANGING SHARES
You may exchange shares of the fund for shares of other Franklin Templeton
funds offered as an investment option in your defined contribution plan,
subject to the terms, and any specific limitations on the exchange (or
"transfer") privilege, described in your plan.
Frequent exchanges can interfere with fund management or operations and drive
up fund costs. To protect shareholders, there are limits on the number and
amount of exchanges that may be made (please see "Market Timers," below).
[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates its NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00
p.m. Pacific time). Each class's NAV is calculated by dividing its net assets
by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of the
shares may change on days that the insurance company separate account cannot
buy or sell shares.
Requests to buy and sell shares are processed on any day the fund is open for
business at the NAV next calculated after we receive the request in proper
form.
REPORTS You will receive confirmations and account statements that show your
account activity. You will also receive the fund's financial reports every
six months. To reduce fund expenses, we try to identify related shareholders
in a household and send only one copy of the financial reports. If you need
additional copies, please call 1-800/774-5001.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
MARKET TIMERS The fund is not designed for market timers, large or frequent
transfers. The fund may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or
(ii) exchanged shares out of the fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the fund's net assets, or (iv) otherwise seem to follow a timing pattern.
Accounts under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserve certain rights, including:
o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to
make payments in securities or other assets of a fund, in the case of an
emergency.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
SHARE CLASSES The fund has three classes of shares, class 1, class 2 and
class 3. Each class is identical except that class 2 and class 3 each has a
distribution plan or "Rule 12b-1 Plan" which is described in prospectuses
offering class 2 and class 3 shares. In addition, each class will bear its
own state and federal registration expenses and transfer agency (shareholder
account maintenance) expenses.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 3 has a distribution plan,
sometimes known as a rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
class 3 shares and provide services to shareholders. Because these fees are
paid out of class 3's assets on an on-going basis, over time these fees will
increase the cost of an investment, and may cost more than paying other types
of sales charges.
[Insert graphic of question mark] QUESTIONS
More detailed information about the Trust and the fund's account policies can
be found in the fund's Statement of Additional Information (SAI). If you have
any questions about the fund, you can write to us at 100 Fountain Parkway,
St. Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.
FOR MORE INFORMATION
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life
insurance contracts, except Franklin S&P 500 Index Fund which is also
available as an investment option to defined contribution plans participating
in Franklin Templeton ValuSelect.
You can learn more about the funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed
performance information, fund holdings, and the auditor's report (Annual
Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment
representative or by calling us at the number below.
Franklin/registered trademark/Templeton/registered trademark/ 1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file 811-5479
FRANKLIN S&P 500 INDEX FUND
TEMPLETON VARIABLE
PRODUCTS SERIES FUND
CLASS 1, CLASS 2 AND CLASS 3
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
500 EAST BROWARD BOULEVARD, SUITE 2100
FORT LAUDERDALE, FLORIDA 33394-3091 1-800/774-5001
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectuses. The
fund's prospectuses, dated October 1, 1999, which we may amend from time to
time, contain the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectuses.
For a free copy of the current prospectus, contact your investment
representative or call 1
800/774-5001.
CONTENTS
Goal and Strategies of the Fund
Risks of the Fund
Investment Restrictions
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Financial Statements
Miscellaneous Information
Description of Bond Ratings
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
WHAT IS THE FUND'S GOAL?
The fund's investment goal is to match the performance of the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index) before the deduction of fund
expenses. This goal is fundamental, which means that it may not be changed
without shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include warrants or rights. Warrants or rights give the
holder the right to purchase a common stock at a given time for a specified
price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay the bondholder, both to repay a loan of money at a
future date and generally to pay interest. These securities include bonds,
notes, debentures, and commercial paper, which differ in the length of the
issuer's payment schedule, with bonds carrying the longest repayment schedule
and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
During periods of rising interest rates, the value of such securities generally
declines. These changes in market value of securities owned by the fund will be
reflected in the fund's net asset value per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the fund may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower by Moody's or BB or lower by S&P or from unrated securities deemed by the
fund's manager to be of comparable quality. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect other risk, such as the risk of
fluctuations in market value and are not absolute standards of quality. However,
lower rated securities typically are riskier than investment grade securities.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are securities on
which no interest is being paid. Please see the appendix for a discussion of the
ratings.
If the rating on an issue held in the fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
fund in its evaluation of the overall investment merits of that security but
will not generally result in an automatic sale of the security.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to assess
whether, at the time of purchase, the planned investment offers potential
returns which are reasonable in light of the risks involved.
BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes and
bankers' acceptances. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument upon
maturity. Such obligations include dollar-denominated certificates of deposit
and bankers' acceptances of banks having total assets in excess of $1 billion,
certificates of deposit of federally insured savings and loan associations
having total assets in excess of $1 billion, or cash and time deposits with
banks. Time deposits are non- negotiable deposits that are held in a banking
institution for a specified time at a stated interest rate.
COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. Investments
in commercial paper are generally limited to obligations rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or if unrated, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P. See the Appendix for a description of commercial paper ratings.
U.S. GOVERNMENT SECURITIES The fund may invest in U.S. Government securities
including: (1) U.S. Treasury obligations with varying interest rates, maturities
and dates of issuance, such as U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (original maturities of one to ten years) and U.S.
Treasury bonds (generally original maturities of greater than ten years); and
(2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities such as the Government National Mortgage Association, the
Export-Import Bank and the Farmers Home Administration. The fund's investments
may include obligations that are supported by the full faith and credit of the
U.S. Government. In the case of U.S. Government securities that are not backed
by the full faith and credit of the U.S. Government (e.g., obligations of the
Federal National Mortgage Association (FNMA) or a Federal Home Loan Bank), the
fund must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the U.S.
itself in the event the agency or instrumentality does not meet its commitments.
REPURCHASE AGREEMENTS In a repurchase agreement, the fund buys U.S. Government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the fund's Board holds the securities subject to
resale on behalf of the fund. The bank or broker-dealer must transfer to the
custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked to market daily, that is, their value
is adjusted daily to equal their market value, to maintain coverage of at least
100%. If the bank or broker-dealer does not repurchase the securities as agreed,
the fund may experience a loss or delay in the liquidation of the securities
underlying the repurchase agreement and may also incur liquidation costs. The
fund, however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy (i.e., banks or broker-dealers
that have been determined by the fund's manager to present no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase transaction).
REVERSE REPURCHASE AGREEMENTS. The fund may also enter into reverse repurchase
agreements, which are the opposite of repurchase agreements but involve similar
mechanics and risks. The fund sells securities to a bank or dealer and agrees to
repurchase them at a mutually agreed price and date. Cash or liquid high-grade
debt securities having an initial market value, including accrued interest,
equal to at least 102% of the dollar amount sold by the fund are segregated,
i.e., set aside, as collateral and marked-to-market daily to maintain coverage
of at least 100%. Reverse repurchase agreements involve the risk that the market
value of the securities retained by the fund may decline below the price of the
securities the fund has sold but is obligated to repurchase under the agreement.
A default by the purchaser might cause the fund to experience a loss or delay in
the liquidation costs. The fund intends to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in such
transactions and it will conduct these activities under the general supervision
of the Board.
LOANS OF PORTFOLIO SECURITIES The fund may lend portfolio securities to banks
and broker-dealers. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. The fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund may terminate the loans at any time and obtain the
return of the securities loaned within five business days. The fund will
continue to receive any interest or dividends paid on the loaned securities and
will continue to have voting rights with respect to the securities. However, as
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in collateral should the borrower fail.
BORROWING The fund may not borrow money, except that it may borrow money from
banks or affiliated investment companies to the extent permitted by the 1940
Act, or any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets (including
the amount borrowed).
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility, or other adverse
conditions exist, or while awaiting suitable investment opportunities, it may
invest the fund's portfolio in a temporary defensive manner. Under such
circumstances, the fund may invest up to 100% of its assets in the following
money market securities:
o short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
o finance company and corporate commercial paper, and other short-term corporate
securities, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by the manager;
o obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks; and
o repurchase agreements with banks and broker-dealers with respect to such
securities.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS The fund may buy securities on a
"when issued" or "delayed delivery" basis. These transactions are arrangements
under which the fund buys securities that have been authorized but not yet
issued with payment for and delivery of the security scheduled for a future
time, generally in 30 to 60 days. Purchases of securities on a when issued or
delayed delivery basis are subject to the risk that the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. Although the fund will generally buy
securities on a when issued basis with the intention of holding the securities,
it may sell the securities before the settlement date if it is deemed advisable.
When the fund is the buyer in this type of transaction, it will maintain, in a
segregated account with its custodian bank, cash or marketable securities having
an aggregate value equal to the amount of the fund's purchase commitments until
payment is made. To the extent the fund engages in when issued and delayed
delivery transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the fund to miss a price or yield considered
advantageous to the fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in net asset value to a greater extent.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
GENERALLY The fund may buy and sell financial futures contracts and options on
these contracts and options on securities and securities indices. The fund may
only sell covered options. As more fully explained below, the fund may not
commit more than 5% of its total assets to initial margin deposits on futures
contracts.
Financial futures contracts and options on these contracts and options on
securities and securities indices are generally considered "derivative
securities." The fund will not use derivative securities for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.
CALL AND PUT OPTIONS ON SECURITIES The fund reserves the right to write (sell)
covered put and call options and buy put and call options that trade on
securities exchanges, although the fund has no present intention of doing so.
WRITING CALL OPTIONS Call options written by the fund give the holder the right
to buy the underlying securities from the fund at a stated exercise price; put
options written by the fund give the holder the right to sell the underlying
security to the fund at a stated exercise price. A call option written by the
fund is "covered" if the fund owns the underlying security which is subject to
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the fund in cash or
marketable securities in a segregated account with its custodian bank. The
premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
In the case of a call option, the writer of an option may have no control over
when the underlying securities must be sold, in the case of a call option,
since, with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not an
option expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other fund investments. If the
fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or at the
same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the fund.
BUYING CALL OPTIONS The fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of the security. The fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.
WRITING PUT OPTIONS A put option gives the buyer of the option the right to
sell, and the writer (seller) the obligation to buy, the underlying security or
currency at the exercise price during the option period. The option may be
exercised at any time prior to its expiration date. The operation of put options
in other respects, including their related risks and rewards, is substantially
identical to that of call options.
The fund would write put options only on a covered basis, which means that the
fund would maintain in a segregated account cash or marketable securities in an
amount not less than the exercise price at all times while the put option is
outstanding. The rules of the clearing corporation currently require that the
assets be deposited in escrow to secure payment of the exercise price. The fund
would generally write covered put options in circumstances where the manager
wishes to buy the underlying security or currency for the fund's portfolio at a
price lower than the current market price of the security or currency. In such
event, the fund would write a put option at an exercise price which, reduced by
the premium received on the option, reflects the lower price it is willing to
pay. Since the fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
this type of transaction would be that the market price of the underlying
security or currency would decline below the exercise price less the premiums
received.
BUYING PUT OPTIONS As the holder of a put option, the fund has the right to sell
the underlying security at the exercise price at any time during the option
period. The fund may enter into closing sale transactions with respect to put
options, exercise them, or permit them to expire.
The fund may buy a put option on an underlying security or currency owned by the
fund (a "protective put") as a hedging technique in order to protect against an
anticipated decline in the value of the security. This hedge protection is
provided only during the life of the put option when the fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the manager deems it desirable to continue to
hold the security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security or currency is eventually
sold.
The fund may also buy put options at a time when the fund does not own the
underlying security. By buying put options on a security it does not own, the
fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price during the life of the put option, the fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
The premium paid by the fund when buying a put option will be recorded as an
asset in the fund's statement of assets and liabilities. This asset will be
adjusted daily to the options' current market value, which will be the latest
sale price at the time at which the Net Asset Value per share of the fund is
computed, the close of the NYSE, or, in the absence of a sale, the latest bid
price. The asset will be extinguished upon expiration of the option, the writing
of an identical option in a closing transaction, or the delivery of the
underlying security or currency upon the exercise of the option.
OPTIONS ON STOCK INDICES The fund may also buy call and put options on stock
indices. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or marketable securities with its custodian
bank in an amount at least equal to the market value of the underlying stock
index and will maintain the account while the option is open or it will
otherwise cover the transaction.
FUTURES CONTRACTS The fund may enter into contracts for the purchase or sale for
future delivery of securities and in such contracts based upon financial indices
("financial futures"). Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the same time a futures contract is purchased or sold, the fund must allocate
cash or securities as a deposit payment ("initial deposit" or "initial margin")
as a partial guarantee of its performance under the contract. Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the fund would provide or receive cash that reflects any
decline or increase in the contract's value. In addition, when the fund enters
into a futures contract, it will segregate assets or "cover" its position in
accordance with the 1940 Act.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset, or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the fund will incur brokerage fees when it
buys or sells futures contracts.
The fund will not engage in transactions in futures contracts or related options
for speculation. In addition, the fund may not buy or sell futures contracts or
related options if, immediately thereafter, the sum of the amount of margin
deposits on its existing futures and related options positions and premiums paid
for related options would exceed 5% of the market value of the fund's total
assets. In instances involving the purchase of futures contracts or related call
options, cash or marketable securities equal to the market value of the futures
contract or related option will be deposited in a segregated account with the
custodian to collateralize such long positions.
To the extent the fund enters into a futures contract, it will maintain with its
custodian bank, to the extent required by SEC rules, assets in a segregated
account to cover its obligations with respect to the contract which will consist
of cash or marketable securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contract and the
aggregate value of the initial and variation margin payments made by the fund
with respect to such futures contracts.
STOCK INDEX FUTURES A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
OPTIONS ON STOCK INDEX FUTURES The fund may buy and sell call and put options on
stock index futures. Call and put options on stock index futures are similar to
options on securities except that, rather than the right to buy or sell stock at
a specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.
FUTURE DEVELOPMENTS The fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the fund's investment objectives and
legally permissible for the fund.
ILLIQUID SECURITIES It is the policy of the fund that illiquid securities
(including illiquid equity securities, defaulted debt securities, loan
participations, securities with legal or contractual restrictions on resale,
repurchase agreements of more than seven days duration, and other securities
which are not readily marketable) may not constitute more than 15% of the value
of the fund's total net assets. Generally, an "illiquid security" is any
security that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the fund has valued the
instrument. Subject to this limitation, the board of trustees has authorized the
fund to invest in restricted securities where such investment is consistent with
the fund's investment objectives and has authorized such securities to be
considered liquid to the extent the manager determines that there is a liquid
institutional or other market for such securities - such as, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The board of trustees will
review on a monthly basis any determination by the manager to treat a restricted
security as liquid, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the board of trustees will take into account the following factors:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to buy or sell the security and the number of
other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer).
To the extent the fund invests in restricted securities that are deemed liquid,
the general level of illiquidity may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
A restricted security is a security that has been purchased through a private
offering and cannot be sold without prior registration under the Securities Act
of 1933 unless the sale is pursuant to an exemption therefrom. Notwithstanding
the restriction on the sale of such securities, a secondary market exists for
many of these securities. As with other securities in the fund's portfolio, if
there are readily available market quotations for a restricted security, it will
be valued, for purposes of determining the fund's net asset value, between the
range of the bid and ask prices. To the extent that no quotations are available,
the securities will be valued at fair value in accordance with procedures
adopted by the board of trustees.
The fund's purchases of restricted securities can result in the receipt of
commitment fees. For example, the transaction may involve an individually
negotiated purchase of short-term increasing rate notes. Maturities for this
type of security typically range from one to five years. These notes are usually
issued as temporary or "bridge" financing to be replaced ultimately with
permanent financing for the project or transaction which the issuer seeks to
finance. Typically, at the time of commitment, the fund receives the security
and sometimes a cash commitment fee. Because the transaction could possibly
involve a delay between the time the fund commits to buy the security and the
fund's payment for and receipt of that security, the fund will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of the purchase
commitments until payment is made. The fund will not buy restricted securities
in order to generate commitment fees.
Notwithstanding the determinations in regard to the liquidity of restricted
securities, the board of trustees remains responsible for such determinations
and will consider appropriate action to maximize the fund's liquidity and its
ability to meet redemption demands if a security should become illiquid after
its purchase. To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased if
qualified institutional buyers become uninterested in buying these securities or
the market for these securities contracts.
RISKS OF THE FUND
FUTURES CONTRACTS entail certain risks. A purchase or sale of a futures contract
may result in losses in excess of the amount invested. The fund may not be able
to close out a futures contract where a liquid secondary market is unavailable
for the futures contract the fund wishes to close. In addition, there may be an
imperfect correlation between movements in the securities on which the futures
or options contract is based and movements in the securities held by the fund.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price. Once the daily limit has been
reached in a futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and, therefore, does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
The fund intends to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active secondary market, but there is no
assurance that a liquid secondary market will exist for any particular contract
or at any particular time. In addition, many of the futures contracts available
may be relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market will develop
or continue to exist.
Use of stock index futures may involve risks because of imperfect correlations
between movements in prices of stock index futures on the one hand and movements
in prices on the other.
OPTIONS ON FUTURES CONTRACTS The amount of risk the fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, the fund's loss
is potentially unlimited and may exceed the amount of the premium received.
Also, the fund may not be able to close out option contract positions where a
liquid secondary market is unavailable for the option the fund wishes to close.
In addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The fund's options investments involve certain risks. The effectiveness of an
options strategy depends on the degree to which price movements in the
underlying securities correlate with price movements in the relevant portion of
the fund's portfolio. In addition, the fund bears the risk that the prices of
its portfolio securities will not move in the same amount as the option it has
purchased, or that there may be a negative correlation that would result in a
loss on both the securities and the option. If the manager is not successful in
using options in managing a fund's investments, the fund's performance will be
worse than if the manager did not employ such strategies.
The purchaser of an option can lose the amount of the premium plus related
transaction costs. The fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
Although the fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. For some options, no secondary market on an exchange may
exist and a fund may have difficulty effecting closing transactions in
particular options. Therefore, the fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of
underlying securities where a buyer exercises put or call options. If the fund
as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
OPTIONS ON STOCK INDICES The fund's ability to use options on stock indexes
effectively depends on the degree to which price movements in the underlying
index or underlying securities correlate with price movements in the relevant
portion of the fund's portfolio. Inasmuch as these securities will not duplicate
the components of any index, the correlation will not be perfect. Consequently,
the fund bears the risk that the prices of the securities underlying the option
will not move in the same amount as the option. It is also possible that there
may be a negative correlation between the index and the securities that would
result in a loss on both the securities and the instrument. Accordingly,
successful use by a fund of options on stock indexes, will be subject to the
manager's ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Positions in stock index options may be closed out only on an exchange that
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular stock index option at any specific time.
Thus, it may not be possible to close an option position. The inability to close
options positions could have an adverse impact on the fund's performance.
REPURCHASE AGREEMENTS The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, the fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by a fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to the fund, these risks can be controlled through
careful monitoring procedures.
REVERSE REPURCHASE AGREEMENTS are considered borrowings by the fund and as such
are subject to the investment limitations discussed under "Investment
Restrictions." These transactions may increase the volatility of the fund's
income or net asset value. The fund carries the risk that any securities
purchased with the proceeds of the transaction will depreciate or not generate
enough income to cover the fund's obligations under the reverse repurchase
transaction. These transactions also increase the interest and operating
expenses of the fund.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund may not:
1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any exemptions
therefrom which may be granted by the U.S. Securities and Exchange Commission,
or for temporary or emergency purposes and then in an amount not exceeding
33-1/3% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan. The fund may also make loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom which may be granted by the U.S. Securities and Exchange Commission.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts or
repurchase transactions, or (c) making short sales of securities to the extent
permitted by the 1940 Act and any rule or order thereunder, or SEC staff
interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities or securities of
other investment companies.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street, Easton, MD 21601
TRUSTEE
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 20 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
Andrew H. Hines, Jr. (76)
150 2nd Avenue N., St. Petersburg, FL 33701
TRUSTEE
Consultant,Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 24 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 49 of the investment
companies in the Franklin Templeton Group of Funds.
Betty P. Krahmer (70)
2201 Kentmere Parkway, Wilmington, DE 19806
TRUSTEE
Director or trustee of various civic associations; director or trustee, as the
case may be, of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
TRUSTEE
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 21 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Barbara J. Green (51)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
SECRETARY
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
James R. Baio (45)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Samuel J. Forester, Jr. (51)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Managing Director, Templeton Worldwide, Inc.; Vice President and Director,
Templeton Global Income Portfolio Ltd.; Director, Closed Joint-Stock Company
Templeton and Templeton Trust Services Pvt. Ltd.; officer of 10 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Templeton Global Bond Managers, a division of Templeton Investment
Counsel, Inc., Founder and Partner, Forester, Hairston Investment Management,
Inc. (1989-1990), Managing Director (Mid-East Region), Merrill Lynch, Pierce,
Fenner & Smith Inc. (1987-1988), and Advisor for Saudi Arabian Monetary Agency
(1982-1987).
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Mark G. Holowesko (39)
Lyford Cay, Nassau, Bahamas
VICE PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 20 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 33 of the investment companies in
the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
John R. Kay (59)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 25 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
Elizabeth M. Knoblock (44)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT - COMPLIANCE
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 20 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).
*This board member is considered an "interested person" under federal securities
laws. Charles B. Johnson is an interested person due to his ownership of
Franklin Resources, Inc. Mr. Brady's status as an interested person results from
his business affiliations with Franklin Resources, Inc. and Templeton Global
Advisors Limited. Mr. Brady and Franklin Resources, Inc. are both limited
partners of Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby
Overseas and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays non-interested board members and Mr. Brady an annual retainer of
$2,000 and a fee of $200 per board meeting attended. Board members who serve on
the audit committee of the trust and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the trust. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Non-interested
board members may also serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
non-interested board members and Mr. Brady by the trust and by the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TRUST1 TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME ($) FUNDS2 ($) SERVES3
Harris J. Ashton 4,000 361,157 48
Nicholas F. Brady 4,000 140,975 20
S. Joseph Fortunato 4,000 367,835 50
Andrew H. Hines, Jr. 5,988 208,075 21
Edith E. Holiday 4,000 211,400 24
Betty P. Krahmer 4,000 141,075 20
Gordon S. Macklin 4,000 361,157 48
Fred R. Millsaps 4,400 210,075 21
1. For the fiscal year ended December 31, 1998. During the period from September
1, 1997, through February 27, 1998, an annual retainer of $6,000 and fees at the
rate of $500 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 162 U.S. based
funds or series.
Non-interested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.
The manager provides investment research and portfolio management services. The
manager has overall responsibility for determining the mix of investments that
it believes will, in a cost-effective manner, achieve the fund's investment goal
and managing cash flows into and out of the fund. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the fund, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
The fund's subadvisor is State Street Global Advisors, a division of State
Street Bank and Trust Company. The subadvisor has an agreement with the manager
and provides the manager with investment management advice and assistance. The
subadvisor selects the securities for the fund to buy, hold or sell. The
subadvisor also selects the brokers who execute the fund's portfolio
transactions. The subadvisor's activities are subject to the board's review and
control, as well as the manager's instruction and supervision. To protect the
fund, the subadvisor and its officers, directors and employees are covered by
fidelity insurance.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of [ ]%
of its average daily net assets. The fee is computed according to the terms of
the management agreement. Each class of the fund's shares pays its proportionate
share of the fee.
The manager pays the subadvisor a fee equal to an annual rate of :
ss. 0.05% of the value of its net assets up to and including $50,000,000; and
ss. 0.04% of the value of its net assets over $50,000,000 up to and including
$100,000,000; and
ss. 0.02% of the value of its net assets over $100,000,0000.
The manager pays this fee from the management fees it receives from the fund.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the trust to provide certain administrative
services and facilities for the trust. Under this agreement, FT Services is
responsible for preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
subcontracts with Templeton Funds Annuity Company (TFAC) to provide certain of
these services. FT Services and TFAC are direct or indirect wholly owned
subsidiaries of Resources and are affiliates of Advisers and the trust's
principal underwriter.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of [ ]% of the fund's average daily net assets.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the securities and other assets of the
fund.
AUDITOr McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
trust's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
RESEARCH SERVICES The manager and subadvisor may receive services from various
affiliates. The services may include information, analytical reports, computer
screening studies, statistical data, and factual resumes pertaining to
securities eligible for purchase by the fund. Such supplemental research, when
utilized, is subject to analysis by the manager and subadvisor before being
incorporated into the investment advisory process.
PORTFOLIO TRANSACTIONS
Subject to oversight by the manager, the subadvisor selects brokers and dealers
to execute the fund's portfolio transactions in accordance with its fiduciary
duty, criteria set forth in the management agreement and subadvisory agreement
and any directions that the board may give.
When placing a portfolio transaction, the subadvisor seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the subadvisor and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The subadvisor will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The subadvisor may pay certain brokers commissions that are higher than those
another broker may charge, if the subadvisor determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the subadvisor's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the subadvisor include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the subadvisor in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the subadvisor in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services the subadvisor receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the subadvisor to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the subadvisor and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the fund's officers are satisfied that the best execution is obtained, the sale
of fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the subadvisor are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
subadvisor, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
DISTRIBUTION AND TAXES
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
differences in the distribution and service (Rule 12b-1) fees, subtransfer
agency (shareholder account maintenance) fees and state and federal registration
fees of the three classes of shares. The fund does not pay "interest" or
guarantee any fixed rate of return on an investment in it's shares.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund intends to elect
and qualify for its current fiscal year to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. As regulated investment
company, the fund generally pays no federal income tax on the income and gains
it distributes. To ensure that individuals holding the Contracts whose assets
are invested in the fund will not be subject to federal income tax on
distributions made by the fund prior to receipt of payments under the Contracts,
the fund intends to comply with the additional requirements of Section 817(h) of
the Internal Revenue Code relating to diversification of its assets. The board
reserves the right not to maintain the qualification of the fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders. In such case, the fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to make certain minimum distributions by December
31 of each year. Federal excise taxes will not apply to the fund in a given
calendar year, however, if each of its shareholders at all times during the
calendar year is either a qualified retirement plan or a segregated asset
account of a life insurance company where the shares are held in connection with
variable products.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
The fund is a diversified series of Templeton Variable Products Series Fund (the
Trust), an open-end management investment company, commonly called a mutual
fund. The Trust was organized as a Massachusetts business trust on February 25,
1988, and is registered with the SEC.
The shareholders of a Massachusetts business trust, could, under certain
circumstances, be held personally liable as partners for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
each series' (fund's) assets for any shareholder held personally liable for
obligations of that fund or the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the fund or the Trust and shall satisfy
any judgment thereon. All such rights are limited to the assets of the fund. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the fund as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the fund's total
assets. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Trust currently offers two classes of shares for each series, class 1 and
class 2, except for the Franklin S&P 500 Index Fund which currently offers three
classes, class 1, class 2 and class 3. The full title of each series and class
is:
Franklin Growth Investments Fund - class 1
Franklin Growth Investments Fund - class 2
Franklin Small Cap Investments Fund - class 1
Franklin Small Cap Investments Fund - class 2
Franklin S&P 500 Index Fund - class 1
Franklin S&P 500 Index Fund - class 2
Franklin S&P 500 Index Fund - class 3
Franklin Strategic Income Investments Fund - class 1
Franklin Strategic Income Investments Fund - class 2
Mutual Shares Investments Fund - class 1
Mutual Shares Investments Fund - class 2
Templeton Asset Allocation Fund - class 1
Templeton Asset Allocation Fund - class 2
Templeton Bond Fund - class 1
Templeton Bond Fund - class 2
Templeton Developing Markets Fund - class 1
Templeton Developing Markets Fund - class 2
Templeton International Fund - class 1
Templeton International Fund - class 2
Templeton Stock Fund - class 1
Templeton Stock Fund - class 2
For all funds except Franklin S&P 500 Index Fund, shares of each class represent
proportionate interests in a fund's assets and are identical except that each
fund's class 2 shares will bear the expense of the class 2 distribution plan.
For Franklin S&P 500 Index Fund, class 2 and class 3 shares will bear the
expense of the class 2 and class 3 distribution plans, respectively. (See "The
Underwriter" below, for a description of these plans.) In addition, each share
class of Franklin S&P 500 Index Fund will bear its own state and federal
registration expenses and transfer agency (shareholder account maintenance)
expenses. On matters that affect the fund as a whole, each class has the same
voting and other rights and preferences as any other class. On matters that
affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the Trust for matters that affect the Trust as a whole. Additional
series and/or classes may be offered in the future.
The Trust has non-cumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Trust does not intend to hold annual shareholder meetings. The Trust or the
fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may be called by the board to consider the removal of a
board member if requested in writing by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a board member. A
special meeting also may be called by the board in its discretion.
PRINCIPAL SHAREHOLDERS Class 1 and class 2 shares of the fund are sold to and
owned only by insurance company separate accounts to serve as the investment
vehicle for variable annuity and life insurance contracts. Class 3 shares of the
fund are offered as an investment option only to defined contribution plans
participating in Franklin Templeton ValuSelect(R).
The insurance companies and defined contribution plans will exercise voting
rights attributable to shares they own in accordance with voting instructions
received by owners of the contracts issued by the insurance companies and plan
participants, respectively. To this extent, the insurance companies and the
defined contribution plans do not exercise control over the trust by virtue of
the voting rights from their ownership of trust shares.
PRICING SHARES
When they buy and sell shares, the trust's shareholders pay and receive the net
asset value per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding. The fund follows the procedures described below.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager and subadvisor.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the close of the NYSE.
The value of these securities used in computing the NAV is determined as of such
times. Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the close of the NYSE that
will not be reflected in the computation of the NAV. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
REDEMPTIONS IN KIND In the case of redemption requests, the board reserves the
right to make payments in whole or in part in securities or other assets of the
fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the fund's net assets and you may incur brokerage fees in converting the
securities to cash. The fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the trust's shares.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to the
extent these expenses are borne by the Insurance Companies. These expenses
include advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The trust pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors may be entitled to receive payment under the class 2 and class 3
Rule 12b-1 plans, as discussed below. Except as noted below, Distributors
receives no other compensation from the trust for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each fund's class 2 has a separate
distribution or "Rule 12b-1" plan. In addition, Franklin S&P 500 Index Fund's
class 3 shares has its own Rule 12b-1 Plan. Under each plan, the fund may pay up
to a maximum of 0.25% (0.15% for the Bond Fund) per year of the average daily
net assets attributable to its class. These fees may be used to compensate
Distributors, the Insurance Companies, defined contribution plan sponsors or
others for distribution and related services and as a servicing fee.
The terms and provisions of the plans, including terms and provisions relating
to required reports, term, and approval, are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the trust and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the non-interested
members of the board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers, or by vote of a majority of the outstanding
shares of the respective class. Distributors, the Insurance Companies or others
may also terminate their respective distribution or service agreement at any
time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the respective class, and all material amendments
to the plans or any related agreements shall be approved by a vote of the
non-interested members of the board, cast in person at a meeting called for the
purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
PERFORMANCE
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the funds to compute or express performance follows.
For share classes offered only to Insurance Company separate accounts (Insurance
Companies) for use in variable annuity and variable life insurance contracts, to
the extent required by SEC rules, the advertised performance of such share
classes will be displayed no more prominently than standardized performance of
the applicable insurance company separate accounts/contracts. For information
about how an Insurance Company may advertise such performance, please consult
the contract prospectus which accompanies the trust prospectus.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.
AVERAGE ANNUAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT however, include any fees or sales charges imposed by the variable
insurance contract for which the fund's class 1 and class 2 are investment
option. If they were included, performance would be lower.
These figures are calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above.
From time to time, the fund may publish its current yield. The current yield
will be calculated by dividing the annualization of the income earned by the
fund during a recent 30-day period by the net asset value per share at the end
of such period. In addition, aggregate, cumulative and average total return
information for the fund over different periods of time may also be advertised.
Except as stated above, the fund will use the same methods for calculating its
performance.
A distribution rate for the fund may also be published in communications
preceded or accompanied by a copy of the trust's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by the fund during the most recent preceding fiscal
quarter by the net asset value per share at the end of such period. The current
distribution rate may differ from current yield because the distribution rate
will be for a different period of time and may contain items of capital gain and
other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for the fund will also be
published along with publication of its distribution rate.
Hypothetical performance information may also be prepared for sales literature
or advertisements. Contract Owners should see the appropriate insurance company
separate account prospectus and SAI.
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average is a
combination of the Dow Jones Industrial Average (30 blue-chip stocks that are
generally leaders in their industry), the Dow Jones Transportation Average (20
transportation stocks), and the Dow Jones Utilities Average (15 utility stocks
involved in the production of electrical energy).
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund Performance
Analysis - measure total return and average current yield for the mutual fund
industry and rank individual mutual fund performance over specified time
periods, assuming reinvestment of all distributions, exclusive of any applicable
sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $223 billion in assets under management for more than 7 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 112 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") does not sponsor, endorse, sell, or promote the fund. S&P makes no
representation or warranty, express or implied, to the owners of the fund or any
member of the public regarding the advisability of investing in securities
generally or in the fund particularly or the ability of the S&P 500 Index to
trace general stock market performance. S&P's only relationship to the fund is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to the
Trust or the fund by Distributors. S&P has no obligation to take the needs of
the Trust or the owners of the fund into consideration in determining, composing
or calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the fund or the
timing of the issuance or sale of the fund or in the determination or
calculation of the equation by which the fund is to be converted into cash. S&P
has no obligation or liability in connection with the administration, marketing
or trading of the fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied to
results to be obtained by license, owners of the fund, or any other person or
entity from use of the S&P 500 Index or any data included therein. S&P makes no
express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting the foregoing, in
no event shall S&P have any liability for any special, punitive, indirect or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of the McGraw-Hill Companies, Inc. and have been licensed
for use by Distributors. S&P does not sponsor, endorse, sell or promote the fund
and S&P makes no representation regarding the advisability of investing in the
fund.
<PAGE>
DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos. 33-20313
FORM N-1A
PART C
Other Information
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the previously filed
documents indicated below, except as noted:
(a) Articles of Incorporation.
(i) Form of Declaration of Trust dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(ii) Form of Amendment of Declaration of Trust
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(iii) Form of Seventh Amended Establishment and Designation of Series
of Shares
(b) By-Laws.
(i) By-Laws dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(c) Instruments Defining Rights of Security Holders.
Not applicable
(d) Investment Advisory Contracts.
(i) Amended and Restated Investment Management Agreement for
Templeton Money Market Fund and Templeton Bond Fund
Filing: Registration Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 27, 1995
(ii) Investment Management Agreement for Templeton Developing Markets
Fund
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 16, 1996
(iii) Investment Management Agreement between Registrant, on behalf
of the Templeton Asset Allocation Fund, and Templeton Investment
Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(iv) Investment Management Agreement between Registrant, on behalf
of the Templeton Stock Fund, and Templeton Investment Counsel,
Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(v) Investment Management Agreement between Registrant, on behalf
of the Templeton International Fund, and Templeton Investment
Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vi) Investment Management Agreement between Registrant, on behalf of
the Franklin Growth Investments Fund, and Franklin Advisers,
Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vii) Investment Management Agreement between Registrant, on behalf
of the Mutual Shares Investments Fund, and Franklin Mutual
Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(viii) Form of Management Agreement between Registrant on behalf of
Franklin Small Cap Investments Fund and Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 18 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 13, 1998
(ix) Form of Investment Management Agreement between Registrant, on
behalf Franklin Strategic Income Investments Fund, and Franklin
Advisers, Inc.
Filing: Post-Effective Amendment No. 23 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: June 30, 1999
(x) Form of Subadvisory Agreement between Franklin Advisers, Inc.
and Templeton Investment Counsel, Inc., on behalf of Franklin
Strategic Income Fund, Inc.
(xi) Form of Investment Management Agreement between Registrant, on
behalf of Franklin S&P 500 Index Fund, and Franklin Advisers,
Inc.
(xii) Form of Subadvisory Agreement between Franklin Advisers, Inc.,
on behalf of Franklin S&P 500 Index Fund, and State Street
Global Advisors, a division of State Street Bank and Trust
Company.
(e) Underwriting Contracts.
(i) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995
(f) Bonus or Profit Sharing Contracts.
Not Applicable
(g) Custodian Agreements.
(i) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No. 13 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996
(ii) Master Custody Agreement between the Registrant and the Bank of
New York
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(h) Other Material Contracts.
(i) Amended and Restated Business Management Agreement
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(ii) Form of Fund Administration Agreement between Registrant, and
Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 19 to Registration
Statement of Registrant on Form N-1A.
File No. 33-20313
Filing Date: February 24, 1999
(iii) Form of Fund Administration Agreement between Registrant,
on behalf of Franklin Strategic Income Investments Fund, and
Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 23
to Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: June 30, 1999
(iv) Form of Fund Administration Agreement between Registrant, on
behalf of Franklin S&P 500 Index Fund, and Franklin Templeton
Services, Inc.
(i) Legal Opinion.
(i) Opinion and consent of counsel dated April 28, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(j) Other Opinions.
Not Applicable
(k) Omitted Financial Statements.
Not Applicable
(l) Initial Capital Agreements.
(i) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988
(m) Rule 12b-1 Plan.
(i) Form of Class 2 Distribution Plan between Registrant and
Franklin Distributors, Inc.
(ii) Form of Class 3 Distribution Plan between Registrant and
Franklin Distributors, Inc.
(o) Rule 18f-3 Plan.
(i) Form of Multiple Class Plan for all series of Registrant
(p) Power Of Attorney.
(i) Power of Attorney from Officers and Directors of the Registrant
executed December 11, 1998
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: February 24, 1999
(n) Exhibit 27 - Financial Data Schedules.
Not applicable.
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT
Not Applicable
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act, and, therefore, is unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding)is asserted by such trustees, officers
or controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of Registrant's investment advisers also serve as
officers and/or directors or trustees for (1) Franklin Resources, Inc.
("Resources"), the corporate parent of all Registrant's Investment Managers,
and/or (2) other investment companies in the Franklin Templeton Group of
Funds.
(i) Templeton Asset Management Ltd., formerly known as Templeton Investment
Management (Singapore) Pte Ltd.
Templeton Asset Management Ltd. ("Templeton Singapore"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton
Developing Markets Fund. For information please see Part B and Schedules A
and D of Form ADV of Templeton Singapore (SEC File 801-46997), incorporated
herein by reference, which set forth the officers and directors of Templeton
Singapore and information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers and directors
during the past two years.
(ii) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to Asset Allocation, Bond,
International, and Stock Funds and in that capacity furnishes portfolio
management services and investment research. TICI also serves as the
sub-adviser for the Franklin Strategic Income Investments Fund. For
additional information please see Part B and Schedules A and D of Form ADV of
TICI (SEC File 801-15125), incorporated herein by reference, which set forth
the officers and directors of TICI and information as to any business,
profession, vocation of employment of a substantial nature engaged in by
those officers and directors during the past two years.
(iii) Franklin Mutual Advisers, LLC.
Franklin Mutual Advisers, LLC ("Mutual Advisers"), a direct, wholly owned
subsidiary of Resources, serves as investment manager to the Mutual Shares
Investments Fund. For information please see Part B and Schedules A and D of
Form ADV of Mutual Advisers (SEC File 801-53068), incorporated herein by
reference, which set forth the officers and directors of Mutual Advisers and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
(iv) Franklin Advisers, Inc.
Franklin Advisers, Inc. ("Advisers"), a direct wholly owned subsidiary of
Resources, serves as Investment Manager to the Franklin Growth Investments
Fund, Franklin Small Cap Investments Fund, Franklin Strategic Income
Investments Fund and Franklin S&P 500 Index Fund. For additional
information, please see Part B and Schedules A and D of Form ADV of Advisers
(SEC File 801-26292), incorporated herein by reference, which sets forth the
officers and directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
(b) The information required by this Item 27 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889).
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, or other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
are kept by the Registrant, and its administrator, Franklin Templeton
Services, Inc., 500 E. Broward Blvd., Fort Lauderdale, Florida 33394-3091, or
its shareholder services agent, Franklin/Templeton Investor Services, Inc.,
100 Fountain Parkway, St. Petersburg, Florida 33716-1205.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30 UNDERTAKINGS
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 16th
day of July, 1999.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: _____________________________________
/s/ Karen L. Skidmore, Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Charles E. Johnson* Principal Executive Officer and Trustee
Charles E. Johnson Dated: July 16, 1999
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: July 16, 1999
Edith E. Holiday* Trustee
Edith E. Holiday Dated: July 16, 1999
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: July 16, 1999
Charles B. Johnson* Trustee
Charles B. Johnson Dated: July 16, 1999
Harris J. Ashton* Trustee
Harris J. Ashton Dated: July 16, 1999
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: July 16, 1999
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: July 16, 1999
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: July 16, 1999
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: July 16, 1999
James R. Baio* Principal Financial Officer
James R. Baio Dated: July 16, 1999
*By
/s/ Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
TEMPLETON VARIABLE PRODUCTS SERIES FUND
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Form of Declaration of Trust *
EX-99.(a)(ii) Form of Amendment of Declaration of Trust *
EX-99(a)(iii) Form of Seventh Amended Establishment and Attached
Designation of Series of Shares
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Amended and Restated Investment *
Management Agreement for Templeton Money
Market Fund and Templeton Bond Fund
EX-99.(d)(ii) Investment Management Agreement for *
Templeton Developing Markets Fund
EX-99.(d)(iii) Investment Management Agreement *
between Registrant, on behalf of the
Templeton Asset Allocation Fund, and
Templeton Investment Counsel, Inc.
EX-99.(d)(iv) Investment Management Agreement *
between Registrant, on behalf of the
Templeton Stock Fund, and Templeton
Investment Counsel, Inc.
EX-99.(d)(v) Investment Management Agreement *
between Registrant, on behalf of the
Templeton International Fund, and
Templeton Investment Counsel, Inc.
EX-99.(d)(vi) Investment Management Agreement *
between Registrant, on behalf of
Franklin Growth Investments Fund,
and Franklin Advisers, Inc.
EX-99.(d)(vii) Investment Management Agreement *
between Registrant, on behalf of the
Mutual Shares Investments Fund, and
Franklin Mutual Advisers, Inc.
EX-99.(d)(viii) Form of Management Agreement between *
Registrant, on behalf of Franklin Small
Cap Investments Fund, and Franklin
Advisers, Inc.
EX-99 (d) (ix) Form of Investment Advisory Agreement *
between Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin Advisers, Inc.
EX-99 (d) (x) Form of Subadvisory Agreement between Attached
Franklin Advisers, Inc., on behalf of Franklin
Strategic Income Fund, and Templeton Investment
Counsel, Inc.
EX-99 (d) (xi) Form of Investment Advisory Agreement Attached
between Registrant, on behalf of
Franklin S&P 500 Index
Fund and Franklin Advisers, Inc.
EX-99(d) (xii) Form of Subadvisory Agreement between Attached
Franklin Advisers, Inc., on behalf of Franklin
S&P 500 Index Fund, and State Street Global
Advisors, a division of State Street Bank and Trust
Company.
EX-99.(e)(i) Amended and Restated Distribution *
Agreement
EX-99.(g)(i) Amended and Restated Custodian Agreement *
EX-99.(g)(ii) Master Custody Agreement between *
the Registrant and the Bank of New York
EX-99.(h)(i) Amended and Restated Business *
Management Agreement
EX-99.(h)(ii) Form of Fund Administration *
Agreement between Registrant,
and Franklin Templeton Services, Inc.
EX-99 (h) (iii) Form of Fund Administration Agreement *
between Registrant, on behalf of Franklin
Strategic Income Investments Fund, and
Franklin Templeton Services, Inc.
EX-99 (h) (iv) Form of Fund Administration Agreement between Attached
Registrant, on behalf of Franklin S&P Index Fund,
and Franklin Templeton Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel dated *
April 28, 1998
EX-99.(l)(i) Letter concerning initial capital *
EX-99(m)(i) Form of Class 2 Distribution Plan Attached
between Registrant and Franklin Distributors, Inc.
EX-99(m)(ii) Form of Class 3 Distribution Plan between Attached
Registrant and Franklin Distributors, Inc.
EX-99.(o)(i) Form of Multiple Class Plan for all Attached
series of Registrant
EX-99.(p)(i) Power of Attorney from Officers *
and Directors of the Registrant dated
December 11, 1998
*Incorporated by Reference
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Seventh Amended Establishment and Designation
of Series of Shares of Beneficial Interest, Par Value $0.01 Per Share
The undersigned, being a majority of the Trustees of Templeton Variable
Products Series Fund, a Massachusetts business trust (the "Trust"), acting
pursuant to Sections 5.11 and 5.12 of the Declaration of Trust dated February
25, 1988 (the "Declaration of Trust") of the Trust, and having divided the
shares of beneficial interest of the Trust into nine separate series (each
individually a "Fund" or collectively the "Funds") and two separate classes by
an Establishment and Designation of Series of Shares of Beneficial Interest, Par
Value $0.01 per Share dated February 25, 1988 and amended on June 15, 1988, May
1, 1992, December 5, 1995, February 14, 1997, February 27, 1998, and May 19,
1999 hereby establish and designate one additional Fund which shall consist of
three classes, and amend and restate the Funds' and each class's special and
relative rights as follows:
1. The Funds shall be designated Templeton Bond Fund, Templeton Stock Fund,
Templeton Asset Allocation Fund, Templeton International Fund, Templeton
Developing Markets Fund, Franklin Growth Investments Fund, Franklin Small Cap
Investments Fund, Mutual Shares Investments Fund, Franklin Strategic Income
Investments Fund, and Franklin S&P 500 Index Fund.
2. The classes shall be designated as follows:
Templeton Asset Allocation Fund Class 1
Templeton Asset Allocation Fund Class 2
Templeton Bond Fund Class 1
Templeton Bond Fund Class 2
Templeton Developing Markets Fund Class 1
Templeton Developing Markets Fund Class 2
Templeton International Fund Class 1
Templeton International Fund Class 2
Templeton Stock Fund Class 1
Templeton Stock Fund Class 2
Franklin Growth Investments Fund Class 1
Franklin Growth Investments Fund Class 2
Franklin Small Cap Investments Fund Class 1
Franklin Small Cap Investments Fund Class 2
Mutual Shares Investments Fund Class 1
Mutual Shares Investments Fund Class 2
Franklin Strategic Income Investments Fund Class 1
Franklin Strategic Income Investments Fund Class 2
Franklin S&P 500 Index Fund Class 1
Franklin S&P 500 Index Fund Class 2
Franklin S&P 500 Index Fund Class 3
3. Each Fund shall be authorized to hold cash and invest in securities and
instruments and use investment techniques as described in the Trust's
registration statement under the Securities Act of 1933, as amended from time to
time. Each share of beneficial interest, par value $0.01 per share, of each Fund
("Share") shall be redeemable as provided in the Declaration of Trust, shall be
entitled to one vote (or fraction thereof in respect of a fractional Share) on
matters on which Shares of that series shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that Fund.
The proceeds of sales of Shares of a Fund, together with any income and gain
thereon, less any diminution or expenses thereof, shall irrevocably belong to
that Fund, unless otherwise required by law. Each Share of a Fund shall be
entitled to receive its pro rata share of net assets of that Fund upon
liquidation of that Fund. Upon redemption of a Shareholder's Shares, or
indemnification for liabilities incurred by reason of a Shareholder being or
having been a Shareholder of a Fund, such Shareholder shall be paid solely out
of the property of such Fund.
4. Shareholders of each Fund shall vote separately as a class on any matter
except, consistent with the Investment Company Act of 1940, as amended, (the
"1940 Act") and the rules thereunder and the Trust's registration statement
thereunder, (i) the election of Trustees, (ii) any amendment to the Declaration
of Trust, unless the amendment affects fewer than all Funds, in which case
Shareholders of the affected Funds shall vote separately, and (iii) ratification
of the selection of auditors. Shareholders of each Fund shall vote together as a
single class on any matter, except to the extent required by the 1940 Act and
the rules thereunder, or when the Trustees have determined that the matter
affects only the interests of Shareholders of a particular class of Shares of a
Fund, in which case only the Shareholders of such class shall be entitled to
vote thereon. In each case of such separate voting, the Trustees shall determine
whether, for the matter to be effectively acted upon within the meaning of Rule
18f-2 under the 1940 Act or any successor rule as to a Fund, the applicable
percentage (as specified in the Declaration of Trust, or the 1940 Act and the
rules thereunder) of the Shares of that Fund alone must be voted in favor of the
matter, or whether the favorable vote of such applicable percentage of the
Shares of each Fund entitled to vote on the matter is required.
5. The assets and liabilities of the Trust shall be allocated among the
above-referenced Funds as set forth in Section 5.11 of the Declaration of Trust,
except as provided below:
a. Liabilities, expenses, costs, charges and reserves related to the
distribution of, and other identified expenses that should properly be allocated
to, the Shares of a particular class may be charged to and borne solely by such
class and the bearing of expenses solely by a class of Shares may be
appropriately reflected (in a manner determined by the Trustees), and cause
differences in, the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the Shares of different classes of a Fund.
Each allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of all classes of
a Fund for all purposes. The liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
Fund shall be allocated among the Funds on the basis of their relative average
daily net assets.
b. The Trustees may from time to time in particular cases make specific
allocations of assets or liabilities among the Funds.
6. Shares of each class of a Fund may vary between themselves as to rights
of redemption and conversion rights, as may be approved by the Trustees and set
forth in a Fund's then-current prospectus.
7. The Trustees (including any successor Trustees) shall have the right at
any time and from time to time to reallocate assets and expenses or to change
the designation of any Fund or any class thereof, now or hereafter created, or
to otherwise change the special and relative rights of any such Fund or any
class thereof, provided that such change shall not adversely affect the rights
of Shareholders of such Fund or class.
IN WITNESS WHEREOF, the undersigned have signed this instrument as of
_________ ____, 1999. This Instrument may be executed by the Trustees on
separate counterparts but shall be effective only when signed by a majority of
the Trustees.
- ------------------------------- ------------------------------
Charles B. Johnson, Harris J. Ashton,
as Trustee as Trustee
- ------------------------------- ------------------------------
Betty P. Krahmer, Fred R. Millsaps
as Trustee as Trustee
- ------------------------------- ------------------------------
Nicholas F. Brady, Andrew H. Hines,
as Trustee as Trustee
- ------------------------------- ------------------------------
S. Joseph Fortunato, Gordon S. Macklin,
as Trustee as Trustee
- -------------------------------
Edith E. Holiday,
as Trustee
SUBADVISORY AGREEMENT
TEMPLETON VARIABLE PRODUCTS SERIES FUND
(on behalf of the Franklin Strategic Income Investments Fund)
THIS SUBADVISORY AGREEMENT made as of the 1st day of July, 1999, by and
between FRANKLIN ADVISERS, INC., a corporation organized and existing under the
laws of the State of California (hereinafter called "FAI"), and TEMPLETON
INVESTMENT COUNSEL, INC., a Florida corporation (hereinafter called "TICI").
W I T N E S S E T H
WHEREAS, FAI and TICI are each registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act"), and engaged in the
business of supplying investment advice, and investment management services, as
an independent contractor; and
WHEREAS, FAI has been retained to render investment advisory services to
Franklin Strategic Income Investments Fund (the "Fund"), a series of Templeton
Variable Products Series Fund (the "Trust"), an investment management company
registered with the U.S. Securities and Exchange Commission (the "SEC") pursuant
to the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, FAI desires to retain TICI to render investment advisory, research
and related services to the Fund pursuant to the terms and provisions of this
Agreement, and TICI is interested in furnishing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. FAI hereby retains TICI and TICI hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Fund, as more fully set forth herein.
(a) Subject to the overall policies, control, direction and review of the
Trust's Board of Trustees (the "Board") and to the instructions and supervision
of FAI, TICI will provide a continuous investment program for the Fund,
including allocation of the Fund's assets among the various securities markets
of the world and, investment research and advice with respect to securities and
investments and cash equivalents in the Fund. So long as the Board and FAI
determine, on no less frequently than an annual basis, to grant the necessary
delegated authority to TICI, and subject to paragraph (b) below, TICI will
determine what securities and other investments will be purchased, retained or
sold by the Fund, and will place all purchase and sale orders on behalf of the
Fund except that orders regarding U.S. domiciled securities and money market
instruments may also be placed on behalf of the Fund by FAI.
(b) In performing these services, TICI shall adhere to the Fund's
investment objectives, policies and restrictions as contained in its Prospectus
and Statement of Additional Information, and in the Trust's Declaration of
Trust, and to the investment guidelines most recently established by FAI and
shall comply with the provisions of the 1940 Act and the rules and regulations
of the SEC thereunder in all material respects and with the provisions of the
United States Internal Revenue Code of 1986, as amended, which are applicable to
regulated investment companies.
(c) Unless otherwise instructed by FAI or the Board, and subject to the
provisions of this Agreement and to any guidelines or limitations specified from
time to time by FAI or by the Board, TICI shall report daily all transactions
effected by TICI on behalf of the Fund to FAI and to other entities as
reasonably directed by FAI or the Board.
(d) TICI shall provide the Board at least quarterly, in advance of the
regular meetings of the Board, a report of its activities hereunder on behalf of
the Fund and its proposed strategy for the next quarter, all in such form and
detail as requested by the Board. TICI shall also make an investment officer
available to attend such meetings of the Board as the Board may reasonably
request.
(e) In carrying out its duties hereunder, TICI shall comply with all
reasonable instructions of the Fund or FAI in connection therewith. Such
instructions may be given by letter, telex, telefax or telephone confirmed by
telex, by the Board or by any other person authorized by a resolution of the
Board, provided a certified copy of such resolution has been supplied to TICI.
2. In performing the services described above, TICI shall use its best
efforts to obtain for the Fund the most favorable price and execution available.
Subject to prior authorization of appropriate policies and procedures by the
Board, TICI may, to the extent authorized by law and in accordance with the
terms of the Fund's Prospectus and Statement of Additional Information, cause
the Fund to pay a broker who provides brokerage and research services an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TICI shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.
3. (a) TICI shall, unless otherwise expressly provided and authorized, have
no authority to act for or represent FAI or the Fund in any way, or in any way
be deemed an agent for FAI or the Fund.
(b) It is understood that the services provided by TICI are not to be
deemed exclusive. FAI acknowledges that TICI may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act, ("Clients") which may invest in
the same type of securities as the Fund. FAI agrees that TICI may give advice or
exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Fund.
4. TICI agrees to use its best efforts in performing the services to be
provided by it pursuant to this Agreement.
5. FAI has furnished or will furnish to TICI as soon as available copies
properly certified or authenticated of each of the following documents:
(a) the Trust's Declaration of Trust, as filed with the Secretary of State
of the Commonwealth of Massachusetts on December 16, 1986, and any other
organizational documents and all amendments thereto or restatements thereof;
(b) resolutions of the Trust's Board of Trustees authorizing the
appointment of TICI and approving this Agreement;
(c) the Trust's original Notification of Registration on Form N-8A under
the 1940 Act as filed with the SEC and all amendments thereto;
(d) the Trust's current Registration Statement on Form N-1A under the
Securities Act of 1933, as amended and under the 1940 Act as filed with the SEC,
and all amendments thereto, as it relates to the Fund;
(e) the Fund's most recent Prospectus and Statement of Additional
Information; and
(f) the Investment Advisory Agreement between the Fund and FAI.
FAI will furnish TICI with copies of all amendments of or supplements to the
foregoing documents.
6. TICI will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where TICI
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Fund.
7. (a) FAI shall pay a monthly fee in cash to TICI of 25% of the investment
advisory fee paid to FAI by the Fund, which fee shall be payable on the first
business day of each month in each year as compensation for the services
rendered and obligations assumed by TICI during the preceding month. The
advisory fee under this Agreement shall be payable on the first business day of
the first month following the effective date of this Agreement, and shall be
reduced by the amount of any advance payments made by FAI relating to the
previous month.
(b) FAI and TICI shall share equally in any voluntary reduction or waiver
by FAI of the management fee due FAI under the Investment Advisory Agreement
between FAI and the Fund.
(c) If this Agreement is terminated prior to the end of any month, the
monthly fee shall be prorated for the portion of any month in which this
Agreement is in effect which is not a complete month according to the proportion
which the number of calendar days in the month during which the Agreement is in
effect bears to the total number of calendar days in the month, and shall be
payable within 10 days after the date of termination.
8. Nothing herein contained shall be deemed to relieve or deprive the Board
of its responsibility for and control of the conduct of the affairs of the Fund.
9. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations or duties hereunder on the part of
TICI, neither TICI nor any of its directors, officers, employees or affiliates
shall be subject to liability to FAI or the Fund or to any shareholder of the
Fund for any error of judgment or mistake of law or any other act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Fund.
(b) Notwithstanding paragraph 9(a), to the extent that FAI is found by a
court of competent jurisdiction, or the SEC or any other regulatory agency to be
liable to the Fund or any shareholder (a "liability"), for any acts undertaken
by TICI pursuant to authority delegated as described in Paragraph 1(a), TICI
shall indemnify and save FAI and each of its affiliates, officers, directors and
employees (each a "Franklin Indemnified Party") harmless from, against, for and
in respect of all losses, damages, costs and expenses incurred by a Franklin
Indemnified Party with respect to such liability, together with all legal and
other expenses reasonably incurred by any such Franklin Indemnified Party, in
connection with such liability.
(c) No provision of this Agreement shall be construed to protect any
director or officer of FAI or TICI, from liability in violation of Sections
17(h) or (i), respectively, of the 1940 Act.
10. During the term of this Agreement, TICI will pay all expenses incurred
by it in connection with its activities under this Agreement other than the cost
of securities (including brokerage commissions, if any) purchased for the Fund.
The Fund and FAI will be responsible for all of their respective expenses and
liabilities.
11. This Agreement shall be effective as of the date given above, and shall
continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons thereof, cast in person at a meeting
called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty (60) days' written notice to FAI and TICI,
and by FAI or TICI upon sixty (60) days' written notice to the other party.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Investment Advisory Agreement between FAI
and the Fund.
14. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
TICI hereby agrees that all records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TICI further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
15. This Agreement may not be materially amended, transferred, assigned,
sold or in any manner hypothecated or pledged without the affirmative vote or
written consent of the holders of a majority of the outstanding voting
securities of the Fund and may not be amended without the written consent of FAI
and TICI.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. The terms "majority of the outstanding voting securities" of the Fund
and "interested persons" shall have the meanings as set forth in the 1940 Act.
18. This Agreement shall be interpreted in accordance with and governed by
the laws of the State of California of the United States of America.
19. TICI acknowledges that it has received notice of and accepts the
limitations of the Trust's liability as set forth in its Agreement and
Declaration of Trust. TICI agrees that the Trust's obligations hereunder shall
be limited to the assets of the Fund, and that TICI shall not seek satisfaction
of any such obligation from any shareholders of the Fund nor from any trustee,
officer, employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: ________________________
Harmon E. Burns
Executive Vice President
TEMPLETON INVESTMENT COUNSEL, INC.
By: _______________________
Donald F. Reed
President
Franklin Strategic Income Investments Fund hereby acknowledges and agrees to the
provisions of paragraphs 9(a) and 10 of this Agreement.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
On behalf of FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
By: __________________________
Charles E. Johnson
President
TEMPLETON VARIABLE PRODUCTS SERIES FUND
on behalf of
FRANKLIN S&P 500 INDEX FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust (the "Trust"), on behalf of FRANKLIN
S&P 500 INDEX FUND (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS,
INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The Adviser
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject to and in accordance
with the investment objectives and policies of the Fund and any directions which
the Trust's Board of Trustees may issue from time to time. In pursuance of the
foregoing, the Adviser shall make all determinations with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, and shall take such steps as may be necessary to implement the same.
Such determinations and services shall include determining the manner in which
any voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's investment securities shall be exercised. The Adviser
shall render or cause to be rendered regular reports to the Trust, at regular
meetings of its Board of Trustees and at such other times as may be reasonably
requested by the Trust's Board of Trustees, of (i) the decisions made with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, (ii) the reasons for such decisions and (iii) the extent
to which those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any directions which the
Trust's Board of Trustees may issue from time to time, shall place, in the name
of the Fund, orders for the execution of the Fund's securities transactions.
When placing such orders, the Adviser shall seek to obtain the best net price
and execution for the Fund, but this requirement shall not be deemed to obligate
the Adviser to place any order solely on the basis of obtaining the lowest
commission rate if the other standards set forth in this section have been
satisfied. The parties recognize that there are likely to be many cases in which
different brokers are equally able to provide such best price and execution and
that, in selecting among such brokers with respect to particular trades, it is
desirable to choose those brokers who furnish research, statistical, quotations
and other information to the Fund and the Adviser in accordance with the
standards set forth below. Moreover, to the extent that it continues to be
lawful to do so and so long as the Board of Trustees determines that the Fund
will benefit, directly or indirectly, by doing so, the Adviser may place orders
with a broker who charges a commission for that transaction which is in excess
of the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in relation
to the value of "brokerage and research services" (as defined in Section 28(e)
(3) of the Securities Exchange Act of 1934) provided by that broker.
Accordingly, the Trust and the Adviser agree that the Adviser shall select
brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and other
services to the Fund, specifically including the quotations necessary to
determine the Fund's net assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research, statistical and
other data to the Adviser or its affiliates which the Adviser or its
affiliates may lawfully and appropriately use in their investment advisory
capacities, which relate directly to securities, actual or potential, of
the Fund, or which place the Adviser in a better position to make decisions
in connection with the management of the Fund's assets and securities,
whether or not such data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising other clients, in such
amount of total brokerage as may reasonably be required. Provided that the
Trust's officers are satisfied that the best execution is obtained, the
sale of shares of the Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
(c) When the Adviser has determined that the Fund should tender securities
pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc.
("Distributors") shall be designated as the "tendering dealer" so long as it is
legally permitted to act in such capacity under the federal securities laws and
rules thereunder and the rules of any securities exchange or association of
which Distributors may be a member. Neither the Adviser nor Distributors shall
be obligated to make any additional commitments of capital, expense or personnel
beyond that already committed (other than normal periodic fees or payments
necessary to maintain its corporate existence and membership in the National
Association of Securities Dealers, Inc.) as of the date of this Agreement. This
Agreement shall not obligate the Adviser or Distributors (i) to act pursuant to
the foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting, or
(ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless the
Trust on behalf of the Fund shall enter into an agreement with the Adviser
and/or Distributors to reimburse them for all such expenses connected with
attempting to collect such fees, including legal fees and expenses and that
portion of the compensation due to their employees which is attributable to the
time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust, not more
frequently than quarterly, of how much total brokerage business has been placed
by the Adviser, on behalf of the Fund, with brokers falling into each of the
categories referred to above and the manner in which the allocation has been
accomplished.
(e) The Adviser agrees that no investment decision will be made or
influenced by a desire to provide brokerage for allocation in accordance with
the foregoing, and that the right to make such allocation of brokerage shall not
interfere with the Adviser's paramount duty to obtain the best net price and
execution for the Fund.
(f) Decisions on proxy voting shall be made by the Adviser unless the Board
of Trustees determines otherwise. Pursuant to its authority, Adviser shall have
the power to vote, either in person or by proxy, all securities in which the
Fund may be invested from time to time, and shall not be required to seek or
take instructions from the Fund with respect thereto. Adviser shall not be
expected or required to take any action other than the rendering of
investment-related advice with respect to lawsuits involving securities
presently or formerly held in the Fund, or the issuers thereof, including
actions involving bankruptcy. Should Adviser undertake litigation against an
issuer on behalf of the Fund, the Fund agrees to pay its portion of any
applicable legal fees associated with the action or to forfeit any claim to any
assets Adviser may recover and, in such case, agrees to hold Adviser harmless
for excluding the Fund from such action. In the case of class action suits
involving issuers held in the Fund, Adviser may include information about the
Fund for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers and
employees available to the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration and management of the
Fund and its investment activities.
D. AUTHORITY TO DELEGATE. The Adviser may, at its expense, select and
contract with one or more investment advisers registered under the Investment
Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for
a Fund for which it is responsible under this Agreement. The Adviser will
compensate any Sub-Adviser for its services to the Fund. The Adviser may
terminate the services of any Sub-Adviser at any time in its sole discretion,
and shall at such time assume the responsibilities of such Sub-Adviser unless
and until a successor Sub-Adviser is selected and the requisite approval of a
Fund's shareholders is obtained. The Adviser will continue to have
responsibility for all advisory services furnished by any Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its
own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of the
Fund's net assets;
E. Salaries and other compensations of executive officers of the Trust
who are not officers, directors, stockholders or employees of the Adviser
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase and
sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the registration
and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the registration
of the Fund and its shares under federal and any applicable state laws;
including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and omissions,
and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service used on
its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in cash
to the Adviser based upon a percentage of the value of the Fund's net assets,
calculated as set forth below, as compensation for the services rendered and
obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets of the
Fund shall be determined in the same manner as that Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the annual rate of 0.15% of
the value of the Fund's net assets.
B. The advisory fee payable by the Fund shall be reduced or eliminated to
the extent that Distributors has actually received cash payments of tender offer
solicitation fees less certain costs and expenses incurred in connection
therewith and to the extent necessary to comply with the limitations on expenses
which may be borne by the Fund as set forth in the laws, regulations and
administrative interpretations of those states in which the Fund's shares are
registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month, the
accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Adviser, the Adviser shall not be subject to liability to the Trust or the
Fund or to any shareholder of the Fund for any act or omission in the
course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any
security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse the
Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of
factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to
any transactions or proposed transaction in the stock or control of the
Adviser or its affiliates (or litigation related to any pending or proposed
or future transaction in such shares or control) which shall have been
undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Adviser or any of its
affiliates or any of their officers, directors, employees or stockholders.
The Adviser shall not be obligated pursuant to the provisions of this
Subparagraph 6(B), to reimburse the Trust for any expenditures related to
the institution of an administrative proceeding or civil litigation by the
Trust or a shareholder seeking to recover all or a portion of the proceeds
derived by any stockholder of the Adviser or any of its affiliates from the
sale of his shares of the Adviser, or similar matters. So long as this
Agreement is in effect, the Adviser shall pay to the Trust the amount due
for expenses subject to this Subparagraph 6(B) within 30 days after a bill
or statement has been received by the Adviser therefor. This provision
shall not be deemed to be a waiver of any claim the Trust may have or may
assert against the Adviser or others for costs, expenses or damages
heretofore incurred by the Trust or for costs, expenses or damages the
Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Adviser,
from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and
shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter
for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding
voting securities of each Fund or by a vote of the Board of Trustees of the
Trust, and (ii) by a vote of a majority of the Trustees of the Trust who
are not parties to the Agreement (other than as Trustees of the Trust),
cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund on
60 days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the Fund in the
event of its assignment; and
(iii) may be terminated by the Adviser on 60 days' written notice
to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed
and delivered, or mailed post-paid, to the other party at any office of
such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the []day of [] 1999.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
on behalf of Franklin S&P 500 Index Fund
By:
Charles E. Johnson
President
FRANKLIN ADVISERS, INC.
By:
Harmon E. Burns
Executive Vice President
TEMPLETON VARIABLE PRODUCTS SERIES FUND
on behalf of
FRANKLIN S&P 500 INDEX FUND
FORM
OF
SUBADVISORY AGREEMENT
This Agreement is entered into as of [______________], by and between Franklin
Advisers, Inc., a California corporation (the "Manager"), and State Street
Global Advisors, a division of State Street Bank and Trust Company, a
Massachusetts trust company (the "Subadvisor").
WHEREAS, Franklin S&P 500 Index Fund (the "Fund") is a series of Templeton
Variable Products Series Fund (the "Trust"), an investment company registered
with the U.S. Securities and Exchange Commission ("SEC") pursuant to the
Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and Subadvisor is a "bank" as defined
in the Advisors Act and both are engaged in the business of supplying, among
other things, investment advice and investment management services to investment
companies and other investment counseling clients; and
WHEREAS, Manager has been retained to render investment advisory services to the
Fund pursuant to an Investment Advisory Agreement, dated _________, (the
"Management Contract"), and Manager desires to retain Subadvisor to render
investment advisory, research and related services to the Fund pursuant to this
Agreement, and Subadvisor is willing to provide such services; and
WHEREAS, the Trust's board of trustees (the "Board"), including a majority of
trustees who are not "interested persons" (as defined below) of any party to
this Agreement, have consented to such an arrangement.
NOW, THEREFORE, in consideration of the covenants and mutual promises contained
herein, the parties hereto, intending to be legally bound hereby, mutually agree
as follows:
I. APPOINTMENT OF SUBADVISOR; COMPENSATION
1.1 Appointment of Subadvisor.
Subject to and in accordance with the provisions hereof, Manager hereby appoints
Subadvisor as investment subadvisor to provide the various investment advisory
and other services to the Fund set forth herein and, subject to the restrictions
set forth herein, and hereby delegates to Subadvisor the authority vested in
Manager pursuant to the Management Contract to the extent necessary to enable
Subadvisor to perform its obligations under this Agreement. Subadvisor accepts
such appointment for the compensation herein provided and agrees to use its best
efforts in performing the services to be provided pursuant to this Agreement.
Manager shall continue to have responsibility for all services to be provided to
the Fund pursuant to the Management Contract and shall oversee and review the
Subadvisor's performance of its duties under this Agreement.
1.2 Scope of Investment Authority.
(a) Subadvisor is hereby authorized, on a discretionary basis, to manage the
investments and determine the composition of the assets of the Fund, subject at
all times to (i) the supervision and control of the Board, (ii) the investment
objectives, policies and limitations, as contained in the Fund's current
Prospectus and Statement of Additional Information and other governing
documents, including the Trust's Declaration of Trust and By-laws, and (iii)
such instructions, policies and limitations relating to the Fund as the Board or
Manager may from time to time adopt and communicate in writing to Subadvisor.
Notwithstanding anything herein to the contrary, Subadvisor is not authorized to
take any action, including the purchase and sale of Fund securities, in
contravention of any restriction, limitation, objective, policy or instruction
described in the previous sentence.
(b) It is understood and agreed that, for so long as this Agreement shall remain
in effect, Subadvisor shall, subject to Section 1.2(a) hereof, retain
discretionary investment authority over the manner in which the Fund's assets
are invested, provided that the Board and Manager shall at all times have the
right to monitor the Fund's investment activities and performance, require
Subadvisor to make reports and give explanations as to the manner in which the
Fund's assets are being invested, and, should either Manager or the Board become
dissatisfied with Subadvisor's performance in any way, terminate this Agreement
in accordance with the provisions of Section 8.2 hereof.
1.3 Independent Contractor.
Notwithstanding anything herein to the contrary, Subadvisor shall be an
independent contractor and will have no authority to act for or represent the
Trust, the Fund or Manager in any way or otherwise be deemed an agent of any of
them, except to the extent expressly authorized by this Agreement or in writing
by the Trust or Manager.
1.4 Compensation.
Subadvisor shall be compensated for the services it performs on behalf of the
Fund in accordance with the terms set forth in Appendix A to this Agreement.
II. SERVICES TO BE PERFORMED BY SUBADVISOR
2.1 Investment Advisory Services.
(a) In fulfilling its obligations to manage the assets of the Fund, Subadvisor
will:
(i) provide the Fund with such investment research, advice and supervision as
the Board and Manager may from time to time consider necessary for the
proper management of the assets of the Fund;
(ii) formulate and implement a continuous investment program for the Fund;
(iii)take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities and other investments, including the
selection of brokers or dealers, the placing of orders for such purchases
and sales in accordance with the provisions of paragraph (b) below and the
affirming of such purchases and sales with counterparties and clearing
agents and ensuring that such purchases and sales are properly settled and
cleared in a timely manner;
(iv) provide to Manager, the Fund's custodian and/or to such other entities as
Manager shall request, such information and reports with respect to the
implementation of the Fund's investment program as Manager shall request,
including daily reporting of all transactions effected by Subadvisor on
behalf of the Fund and daily reporting of pricing and all other information
sufficient to enable the Fund to comply with Rule 22c-1 under the 1940 Act.
Subadvisor shall promptly forward to Manager and the Fund's custodian
copies of all brokerage or dealer confirmations for each transaction
effected for the Fund and shall at the close of business each day provide
Manager and the Fund's custodian with copies of trade tickets for each such
transaction;
(v) provide the Board in advance of the Board's regular and special meetings
and at such other times as may be reasonably requested by the Board, a
report of its activities hereunder on behalf of the Fund and its proposed
strategy, and such other periodic or special reports as the Board or
Manager may reasonably request, all in such form and detail as requested by
the Board, and make an investment officer available to attend such meetings
as the Board may request. Subadvisor shall also provide the Board and
Manager with copies of Subadvisor's quarterly compliance reports prepared
in connection with Subadvisor's code of ethics adopted in compliance with
Rule 17j-1 of the 1940 Act promptly after such reports are available; and
(vi) provide advice and assistance to Manager as to the determination of the
fair value of certain securities where market quotations are not readily
available for purposes of calculating net asset value of the Fund in
accordance with valuation procedures and methods established by the Board.
(b) Subadvisor shall place all orders for the purchase and sale of portfolio
securities for the Fund's account with brokers, dealers, futures commission
merchants or banks selected by Subadvisor. Subadvisor shall use its best
efforts to obtain for the Fund the most favorable net price and execution
available. Subject to the policies and procedures adopted by the Board,
Subadvisor may, to the extent authorized by law and in accordance with the
Fund's Prospectus and Statement of Additional Information, cause the Fund
to pay a broker or dealer who provides brokerage and research services (as
defined in Section 28(e) of the Securities Exchange Act of 1934) an amount
of commission for effecting a portfolio investment transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction, in recognition of the brokerage and research
services provided by the broker or dealer. To the extent authorized by
applicable law, Subadvisor shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action. The Board shall periodically review the commissions
paid by the Fund to determine if the commissions paid over representative
periods were reasonable in relation to the benefits to the Fund. Subject to
applicable law and the policies and procedures adopted by the Board,
Subadvisor may select brokers or dealers that are affiliated with
Subadvisor in executing purchases and sales of securities for the Fund.
2.2 Administrative and Other Services.
(a) Facilities and Personnel.
Subadvisor will, at its expense, furnish (i) all necessary investment and
management facilities, including salaries of personnel required for it to
execute its duties faithfully under this Agreement, and (ii) administrative
facilities, including bookkeeping, clerical personnel and equipment
necessary for the efficient conduct of the investment affairs of the Fund
(excluding determination of net asset value and shareholder accounting
services).
(b) Maintenance of Books and Records.
Subadvisor agrees to maintain, in the form and for the period required by
Rules 31a-1 and 31a-2 under the 1940 Act, all accounts, books and records
with respect to the Fund as are required to be maintained pursuant to the
1940 Act. Subadvisor agrees that such accounts, books and records are the
property of the Trust and will be surrendered to the Trust or Manager (or
any other party at the Trust's direction) promptly upon request. Subadvisor
agrees to provide copies of such accounts, books and records to Manager and
the Fund's accountants and auditors promptly upon request. Subadvisor shall
timely furnish to Manager all information relating to Subadvisor's services
under this Agreement needed by Manager to keep the other books and records
of the Fund required by Rule 31a-1 under the 1940 Act. Subadvisor further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940
Act any such records as are required to be maintained by it pursuant to
this Agreement.
(c) Provision of Certain Additional Information.
Subadvisor shall provide such information as is necessary to enable the
Trust and Manager to prepare and update the Trust's registration statement
(and any supplement thereto), the Fund's financial statements and any other
periodic financial reports or other documents required to be filed with the
SEC and any other regulatory entity. Subadvisor understands that the Trust
and Manager will rely on such information in the preparation of the Trust's
registration statement, the Fund's financial statements and other reports
and documents, and hereby covenants that any such information provided by
Subadvisor expressly for use in such registration statements, financial
statements and/or other reports or documents shall be true and complete in
all material respects. Subadvisor agrees to provide such other information
as the Fund or Manager may reasonably request for use in the preparation of
other materials necessary or helpful for the underwriting and distribution
of the Fund's shares.
(d) Exercise of Voting Rights for Investments.
Manager hereby delegates to Subadvisor discretionary authority to determine
the manner in which any voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's investment securities
shall be exercised. Subadvisor shall use its best good faith judgment to
exercise such rights in a manner which best serves the interests of the
Fund and its shareholders. Subadvisor shall promptly notify Manager and the
Fund's custodian in the event Subadvisor exercises any such rights with
respect to the Fund's investment securities. Upon written notice to
Subadvisor, the Board or Manager may at any time withdraw the authority
granted to Subadvisor pursuant to this Section to perform any or all of the
voting services contemplated hereby.
III. EXPENSES
During the term of this Agreement, Subadvisor will pay all expenses
incurred by it in connection with its activities under this Agreement other
than the cost of securities (including brokerage commissions, if any)
purchased for the Fund. The Fund and Manager will be responsible for their
respective expenses and liabilities.
IV. COMPLIANCE WITH APPLICABLE LAWS AND GOVERNING DOCUMENTS; CONFIDENTIALITY
4.1 Compliance with Applicable Laws and Governing Documents.
Subadvisor will comply with (i) all applicable state and federal laws and
regulations governing the performance of Subadvisor's duties hereunder,
(ii) the investment objective, policies and limitations, as provided in the
Fund's current Prospectus, Statement of Additional Information and other
governing documents, and (iii) such instructions, policies and limitations
relating to the Fund as the Board or Manager may from time to time adopt
and communicate to Subadvisor. Without limiting the generality of the
foregoing, Subadvisor shall ensure that (1) the Fund shall comply with
Section 817(h) of the Internal Revenue Code of 1986 and the regulations
issued thereunder (the "Code"), specifically Regulation Section 1.817-5,
relating to the diversification requirements for variable annuity,
endowment, and life insurance contracts, and any amendments or other
modifications to such Section or regulations; (2) Subadvisor's activities
do not disqualify the Fund as a regulated investment company under
Subchapter M of the Code or any successor provision; and (3) any and all
applicable state insurance law restrictions on investments that operate to
limit or restrict the investments that the Fund may otherwise make and
which Manager has provided to Subadvisor in writing are complied with as
well as any changes thereto.
Subadvisor shall submit to all regulatory and administrative bodies having
jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may reasonably request or require pursuant to applicable laws and
regulations.
Manager will provide Subadvisor with copies of (i) the Trust's Declaration of
Trust and By-laws, as currently in effect, (ii) the Fund's currently effective
Prospectus and Statement of Additional Information, and all updates thereto, as
set forth in the Trust's registration statement under the 1940 Act and the
Securities Act of 1933, as amended, (iii) any instructions, investment policies
or other restrictions adopted by the Board or Manager supplemental thereto, and
(iv) the Management Contract. Manager will provide Subadvisor with such further
documentation and information concerning the investment objectives, policies and
restrictions applicable to the Fund, and such other information relating to the
business affairs of the Fund as Subadvisor from time to time reasonably requests
in order to discharge its obligations hereunder. Manager shall provide or cause
to be provided timely information to Subadvisor regarding such matters as
inflows to and outflows from the Fund and the cash requirements of the Fund.
4.2 Confidentiality.
Subadvisor will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund and prior, present and
potential shareholders, and will not use such records or information other than
in performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Fund. The foregoing shall not be
applicable to any information that is publicly available when provided or which
thereafter becomes publicly available other than in contravention of this
Section or which is required to be disclosed by any regulatory authority in the
lawful and appropriate exercise of its jurisdiction, by judicial or
administrative process or otherwise by applicable law or regulation.
Subadvisor agrees not to disclose the existence of this Agreement or the
underlying business relationship without the prior written approval of Manager.
V. ACTIVITIES OF SUBADVISOR AND CONFLICTS OF INTEREST
It is understood that the services provided by Subadvisor are not to be deemed
exclusive. Manager acknowledges that Subadvisor may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act ("Clients"), which may invest in
the same type of securities as the Fund, and Subadvisor is free to render
services to others so long as Subadvisor's services under this Agreement are not
impaired. Manager agrees that Subadvisor may give advice or exercise investment
responsibility and take such other action with respect to Clients which may
differ from advice given or the timing or nature of action taken with respect to
the Fund.
If purchases or sales of securities for the Fund or other Clients of Subadvisor
or its affiliates arise for consideration at or about the same time, Subadvisor
shall make transactions in such securities for the Fund and its other Clients in
a manner deemed equitable to all. It is agreed that, on occasions when
Subadvisor deems the purchase or sale of a security to be in the best interest
of the Fund as well as other Clients, it may, to the extent permitted by
applicable laws or regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Fund and the other Clients in order
to obtain favorable execution and lower brokerage commissions or prices. In that
event, allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by Subadvisor in the manner that is
most equitable and consistent with its fiduciary obligations to the Fund and to
such other Clients. In some cases these procedures may adversely affect the size
of the position obtainable for or disposed of by the Fund or have an adverse
effect on price.
It is understood that the trustees, officers, agents and shareholders of the
Trust are or may be interested in Subadvisor as directors, officers,
stockholders or otherwise; that directors, officers, agents and stockholders of
Subadvisor are or may be interested in the Trust as trustees, officers,
shareholders or otherwise; that Subadvisor may be interested in the Trust; and
that the existence of any such dual interest shall not affect the validity of
this Agreement or of any transactions hereunder except as otherwise provided in
the Trust's Declaration of Trust and the declaration of trust of Subadvisor,
respectively, or by specific provisions of applicable law.
No provision of this Agreement shall be construed to protect any director or
officer of Manager or Subadvisor from liability in violation of Sections 17(h)
and (i) of the 1940 Act.
VI. REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Representations of Manager. Manager represents, warrants and agrees that:
(a) Manager is a corporation organized under the laws of the State of
California;
(b) Manager is and shall remain duly registered as an "investment adviser" under
the Advisers Act;
(c) Manager has been duly appointed by the Board to provide investment services
to the Fund as contemplated by the Management Contract;
(d) the execution, delivery and performance of this Agreement are within
Manager's powers, have been and remain duly authorized by all necessary
corporate action and will not violate or constitute a default under any
applicable law or regulation or of any decree, order, judgment, agreement or
instrument binding on Manager;
(e) no consent (including, but not limited to, exchange control consents) of any
applicable governmental authority or body is necessary, except for such consents
as have been obtained and are in full force and effect, and all conditions of
which have been duly complied with; and
(f) this Agreement constitutes a legal, valid and binding obligation enforceable
against Manager.
6.2 Representations of Subadvisor. Subadvisor represents, warrants and agrees
that:
(a) Subadvisor is a Massachusetts trust company established pursuant to the laws
of the Commonwealth of Massachusetts;
(b) Subadvisor is registered as an "investment adviser" under the Advisers Act
or is not required to register as an "investment adviser" thereunder;
(c) Subadvisor has filed a notice of exemption pursuant to Rule 4.14 under the
Commodity Exchange Act with the Commodities Futures Trading Commission and the
National Futures Association, or is not required to file such exemption;
(d) the execution, delivery and performance of this Agreement are within
Subadvisor's powers, have been and remain duly authorized by all necessary
corporate action and will not violate or constitute a default under any
applicable law or regulation or of any decree, order, judgment, agreement or
instrument binding on Subadvisor;
(e) no consent (including, but not limited to, exchange control consents) of any
applicable governmental authority or body is necessary, except for such consents
as have been obtained and are in full force and effect, and all conditions of
which have been duly complied with;
(f) this Agreement constitutes a legal, valid and binding obligation enforceable
against Subadvisor; and
(g) the total fee to be paid by Manager to Subadvisor pursuant to this Agreement
is not higher than the total fee, determined on a percentage of assets basis and
including the total fee payable after any reduction or waiver of fees by
Subadvisor or its affiliates (the "Total Fee"), paid as of the effective date of
this Agreement, and shall be no higher than the Total Fee that may be paid in
the future, by any investment manager, registered investment company (or series
thereof), separate account or other entity to Subadvisor (and its affiliates) in
connection with the provision of investment management or subadvisory investment
management services by Subadvisor (and its affiliates) to any registered
investment company (or series thereof), separate account or other investment
vehicle which has as its principal investment strategy tracking or replicating
the total return performance of the S&P 500 Composite Stock Price Index (each,
an "Equivalent Client").
(1) In the event Subadvisor (or any affiliate of Subadvisor) enters into any
arrangement with an Equivalent Client where the Total Fee to be paid to
Subadvisor (or its affiliates) by such Equivalent Client is less than the
fee payable to Subadvisor under this Agreement (a "Lesser Fee"), Subadvisor
agrees to promptly notify Manager of such arrangement and shall agree to
promptly amend this Agreement so that the total fees payable hereunder are
at most equal to the Lesser Fee payable to Subadvisor (or its affiliates)
by any Equivalent Client.
(2) To the extent that a delay occurs between (i) the date Subadvisor (or any
affiliate of Subadvisor) enters into any arrangement with an Equivalent
Client under which such Equivalent Client is to pay a Lesser Fee, and (ii)
the date Subadvisor notifies Manager of such arrangement, then (iii)
Manager shall receive a corresponding credit against its Total Fee based on
the difference between the Lesser Fee and the Total Fee paid by Manager
during the period of the delay.
6.3 Covenants of Subadvisor.
(a) Notification Regarding Certain Events Affecting Subadvisor.
Subadvisor will promptly notify the Trust and Manager in writing of the
occurrence of any event that could have a material impact on the
performance of its obligations pursuant to this Agreement, including
without limitation: (i) the occurrence of any event which could disqualify
Subadvisor from serving as an investment adviser of a registered investment
company pursuant to Section 9(a) of the 1940 Act or otherwise; (ii) any
material change in Subadvisor's overall business activities that may have a
material adverse effect on Subadvisor's ability to perform under its
obligations under this Agreement; (iii) any event that would constitute a
change in control of Subadvisor; and (iv) the existence of any pending or
threatened audit, investigation, complaint, examination or other inquiry
(other than routine regulatory examinations or inspections) relating to the
Fund conducted by any state or federal governmental regulatory authority.
(b) Code of Ethics.
Subadvisor will adopt a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act and will provide the Trust
and Manager with a copy of such code of ethics, evidence of its adoption
and copies of any supplemental policies and procedures implemented to
ensure compliance therewith. Subadvisor agrees that it will promptly supply
Manager with copies of any material changes to any of the documents
provided by Subadvisor pursuant to this Section.
(c) Insurance.
Subadvisor shall maintain for the duration hereof, with an insurer
acceptable to Manager, a blanket bond and professional liability (errors
and omissions) insurance in amounts reasonably acceptable to Manager.
Subadvisor agrees that such insurance shall be considered primary and
Subadvisor shall assure that such policies pay claims prior to similar
policies that may be maintained by Manager. In the event Subadvisor fails
to have in force such insurance, that failure will not exclude Subadvisor's
responsibility to pay up to the limit Subadvisor would have had to pay had
said insurance been in force.
(d) Year 2000 Compliance.
(i) WARRANTY AND DEFINITION. Subadvisor is taking reasonable and
comprehensive steps to ensure that its products and services (and those of its
third-party suppliers) ("Services") are Year 2000 Compliant. "Year 2000
Compliant" means that:
(aa) Such Services operate correctly with dates on or after January 1,
2000;
(bb) Such Services accurately account for twentieth and twenty-first
century dates; and
(cc) All date-related data fields, user interfaces and data interfaces
include an indication of the century such that such Services accurately
recognize and accommodate the rollover to the Year 2000 (including processing
the fact that Year 2000 is a leap year) without normal operation being impaired
by the advent of the Year 2000.
At Manager's request, Subadvisor shall provide test scripts sufficient to
verify the Services' compliance with this Section.
(ii) BREACH OF YEAR 2000 WARRANTY: Upon a breach of this subsection 6.3(d),
and in addition to any other remedies available to the Fund, Trust and Manager
hereunder, Subadvisor shall provide correction(s) to the products and services
to make them Year 2000 Compliant within a commercially reasonable time frame of
receiving notice of such non-compliance. If Subadvisor is unable to supply such
correction(s) within such period, Manager may at its option treat such failure
as a material breach and terminate this Agreement effective thirty (30) days
after Subadvisor's receipt of Manager's notice of non-compliance. Alternatively,
in the event of any breach of this subsection 6.3(d), Manager may elect
immediately to terminate this Agreement for Subadvisor's material breach without
any cure period.
VII. LIABILITY OF SUBADVISOR; INDEMNIFICATION
7.1 Liability of Subadvisor.
(a) Neither Subadvisor, nor any of its directors, officers or employees, shall
be liable to Manager, the Fund or the Trust for any loss resulting from
Subadvisor's acts or omissions as subadvisor to the Fund, except to the
extent any such losses result from (i) Subadvisor's breach of its duties
hereunder, or (ii) bad faith, willful misfeasance, reckless disregard or
gross negligence on the part of Subadvisor in the performance of
Subadvisor's duties and obligations under this Agreement.
(b) Notwithstanding the foregoing, Subadvisor agrees to reimburse the Trust,
the Fund and Manager for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust, the Fund and Manger in the
preparation, printing and distribution of proxy statements, amendments to
the Trust's Registration Statement, holdings of meetings of the Trust's
shareholders or trustees, the conduct of factual investigations, any legal
or administrative proceedings (including any applications for exemptions or
determinations by the SEC) which the Trust, the Fund or Manager incurs as
the result of action or inaction of the Subadvisor or any of its affiliates
or any of their officers, directors, employees or stockholders where the
action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock
or control of Subadvisor or its affiliates (or litigation related to any
pending or proposed or future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the
Trust's Board of Trustees; or, (ii) is within the control of Subadvisor or
any of its affiliates or any of their officers, directors, employees or
stockholders. So long as this Agreement is in effect, the Subadvisor shall
pay to the Trust and Manager the amount due for expenses subject to this
Section 7.1(b) within 30 days after a bill or statement has been received
by Subadvisor therefor. This provision shall not be deemed to be a waiver
of any claim the Trust, the Fund or Manager may have or may assert against
Subadvisor or others for costs, expenses or damages heretofore incurred by
the Trust, the Fund or Manager or for costs, expenses or damages the Trust,
the Fund or Manager may hereafter incur which are not reimbursable to it
hereunder.
7.2 Indemnification.
(a) Subadvisor agrees to indemnify and hold the Trust, the Fund and Manager
harmless from any and all direct or indirect liabilities, losses or damages
(including reasonable attorneys fees) suffered by the Trust, the Fund or
Manager resulting from (i) Subadvisor's breach of its duties hereunder, or
(ii) bad faith, willful misfeasance, reckless disregard or gross negligence
on the part of Subadvisor in the performance of Subadvisor's duties and
obligations under this Agreement, except to the extent such loss results
from the Trust's, the Fund's or Manager's own willful misfeasance, bad
faith, reckless disregard or negligence in the performance of their
respective duties and obligations under the Management Contract or this
Agreement.
(b) Manager hereby agrees to indemnify and hold Subadvisor harmless from any
and all direct or indirect liabilities, losses or damages (including
reasonable attorneys fees) suffered by Subadvisor resulting from (i)
Manager's breach of its duties hereunder, or (ii) bad faith, willful
misfeasance, reckless disregard or gross negligence on the part of Manager
in the performance of Manager's duties and obligations under this
Agreement, except to the extent such loss results from Subadvisor's own
willful misfeasance, bad faith, reckless disregard or negligence in the
performance of Subadvisor's duties and obligations under this Agreement.
VIII. DURATION, TERMINATION AND AMENDMENT OF AGREEMENT
8.1 Effective Date; Duration; Continuance.
(a) This Agreement shall become effective on ______________, provided that this
Agreement shall not take effect unless it has first been approved (i) by a
vote of a majority of those trustees of the Trust who are not parties to
this Agreement or "interested persons" (as defined in the 1940 Act) of any
such party, and (ii) by vote of a majority of the Fund's outstanding voting
securities.
(b) Subject to prior termination pursuant to Section 8.2 below, this Agreement
shall continue in effect for two (2) years following the effective date,
and indefinitely thereafter, but only so long as the continuance after such
date shall be specifically approved at least annually (i) by vote of the
Board or by a vote of a majority of the outstanding voting securities of
the Fund, and (ii) by the vote of a majority of the trustees of the Trust
who are not "interested persons" (as defined in the 1940 Act) of any party
to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval.
(c) If any continuance of this Agreement is not obtained, Subadvisor will
continue to act as the Fund's investment subadvisor pending the required
approval of the continuance of this Agreement or of a new contract with
Subadvisor or a different subadvisor or other definitive action; provided,
that the compensation received by Subadvisor during such period is in
compliance with Rule 15a-4 under the 1940 Act or any successor provision.
8.2 Termination and Assignment.
(a) Subject to earlier termination as provided pursuant to Section 6.3(d), this
Agreement may be terminated at any time, without the payment of any
penalty, by the Board or the vote of a majority of the outstanding voting
securities of the Fund upon sixty days' written notice to Manager and
Subadvisor, and by Manager or Subadvisor upon sixty days' written notice to
the Trust and the other party.
(b) This Agreement will terminate automatically, without the payment of any
penalty, in the event of its assignment (as defined in the 1940 Act), or in
the event the Management Contract is terminated for any reason.
(c) Notwithstanding the foregoing, this Agreement may be terminated by Manager
upon material breach by Subadvisor of any of the representations and
warranties set forth in this Agreement, if such breach shall not have been
cured within a 20 day period after notice of such breach; or immediately if
Subadvisor becomes unable to discharge its duties and obligations under
this Agreement.
8.3 Amendments.
This Agreement may not be amended without the prior written consent of each of
the parties hereto and unless such amendment is specifically approved (i) if
required by law, by the vote of a majority of the outstanding voting securities
of the Fund, and (ii) by the vote of a majority of the trustees of the Trust who
are not interested persons (as defined in the 1940 Act) of any person to this
Agreement cast in person at a meeting called for the purpose of voting on such
approval.
8.4 Definitions.
The terms "registered investment company," "vote of a majority of the
outstanding voting securities," "assignment," and "interested persons," when
used herein, shall have the respective meanings specified in the 1940 Act as now
in effect or as hereafter amended, and subject to such orders or no-action
letters as may be granted by the SEC.
IX. MISCELLANEOUS PROVISIONS
9.1 Notices and Instructions.
All notices required to be given pursuant to this Agreement shall be delivered
or mailed to the last known business address of the Trust, Manager or
Subadvisor, as the case may be, in person or by registered mail or a private
mail or delivery service providing the sender with notice of receipt. Notice
shall be deemed given on the date delivered or mailed in accordance with this
Section 9.1. Instructions may be given by letter, telex, telefax or telephone
confirmed by telex, by the Board or by any other person authorized by a
resolution of the Board, provided a certified copy of such resolution has been
supplied to Subadvisor.
9.2 Entire Agreement.
This Agreement contains the entire understanding and agreement of the parties
with respect
to the subject hereof.
9.3 Captions.
The headings in the sections of this Agreement are inserted for convenience of
reference only and shall not constitute a part of the Agreement.
9.4 Severability.
If any provision of this Agreement shall be held or made invalid by court
decision, statute, rule or otherwise, this Agreement shall be construed, insofar
as is possible, as if such portion had never been contained herein.
9.5 Governing Law.
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of California (without giving effect to
the choice of law provisions thereof), or any of the applicable provisions of
the 1940 Act. To the extent that the laws of the State of California, or any of
the provisions in this Agreement, conflict with applicable provisions of the
1940 Act, the latter shall control.
9.6 Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, all of which shall together constitute one and the same
instrument.
9.7 Limitation of Liability.
Subadvisor acknowledges that it has received notice of and accepts the
limitations on the Trust's liability as set forth in its Agreement and
Declaration of Trust. Subadvisor agrees that the Trust's obligations hereunder,
if any, shall be limited to the assets of the Fund, and that Subadvisor shall
not seek satisfaction of any such obligation from any shareholders of the Fund
or from any trustee, officer, employee or agent of the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
FRANKLIN ADVISERS, INC.
By: ____________________________
Name:
Title:
STATE STREET GLOBAL ADVISORS,
a division of State Street Bank and Trust Company
By: ____________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
Franklin S&P 500 Index Fund hereby acknowledges and agrees to the provisions of
Section 3 and Section 7.1 of this Agreement.
TEMPLETON VARIABLE PRODUCTS SERIES FUND on behalf of FRANKLIN S&P 500 INDEX FUND
By: ____________________________
Name:
Title:
APPENDIX A
Pursuant to Section 1.4 of the Agreement, Manager shall pay a monthly
subadvisory fee in cash to Subadvisor based upon a percentage of the value of
the Fund's net assets, calculated as set forth below, which fee shall be payable
on the first business day of the month in each year as compensation for the
services rendered and obligations assumed by Subadvisor during the preceding
month. The fee shall be payable on the first business day of the first month
following the effective date of the Agreement.
For purposes of calculating such fee, the value of the net assets of the Fund
shall be determined in the same manner as that the Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Fund's currently
effective Prospectus and Statement of Additional Information. The rate of the
subadvisory fee payable by Manager shall be calculated daily at the following
annual rates:
0.05% of the value of its net assets up to and including $50,000,000;
and
0.04% of the value of its net assets over $50,000,000 up to and
including $100,000,000; and
0.02% of the value of its net assets over $100,000,000.
If the Agreement is terminated prior to the end of any month, the monthly
subadvisory fee shall be prorated for the portion of the month the Agreement is
in effect and shall be payable promptly after the date of the termination.
Subadvisor agrees to look exclusively to Manager, and not to any assets of the
Trust or the Fund, for the payment of Subadvisor's fees arising under the
Agreement.
3
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of ___________, 1999 between TEMPLETON VARIABLE PRODUCTS
SERIES FUND, a Massachusetts business trust ("the Investment Company"), on
behalf of its series FRANKLIN S&P 500 INDEX FUND (the "Fund") and FRANKLIN
TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the parties hereby
agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to provide
the following services to the Fund:
(a) providing office space, telephone, office equipment and supplies
for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf
of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax credits; and
attending to routine correspondence and other communications with
individual Shareholders when asked to do so by the Fund's shareholder
servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio,
including collecting quotations from pricing services engaged by the Fund;
providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports
and other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements
under the federal securities laws, including the Investment Company Act of
1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or
regulations, and maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal
securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies
funding variable insurance products; the Fund's investment objectives,
policies and restrictions; and the Code of Ethics and other policies
adopted by the Investment Company's Board of Trustees ("Board") or by the
Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed to
carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation NSARs,
proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.10% of the average daily
net assets of the Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Investment Company shall be directed or approved by the
vote of a majority of the Board of the Investment Company in office at the time
or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers.
TEMPLETON VARIABLE PRODUCTS SERIES FUND on behalf of
Franklin S&P 500 Index Fund
By:
Donald F. Reed
President
FRANKLIN TEMPLETON SERVICES, INC.
By:
Martin L. Flanagan
President
CLASS 2 DISTRIBUTION PLAN
I. Investment Company: TEMPLETON VARIABLE PRODUCTS SERIES FUND
II. Funds: TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON STOCK FUND
FRANKLIN S&P 500 INDEX FUND
FRANKLIN GROWTH INVESTMENTS FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
MUTUAL SHARES INVESTMENTS FUND
PREAMBLE TO CLASS 2 DISTRIBUTION PLAN
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("Investment Company") is an open-end
management investment company organized as a Massachusetts business trust, which
offers the shares of beneficial interest of its series (each, a "Fund") to
certain life insurance companies ("Insurance Companies") for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
"Variable Contracts").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 2 (the "Class") shares of each Fund named above, which
Plan shall take effect on the date Class 2 shares of the Funds are first offered
(the "Effective Date of the Plan"). The Plan has been approved by a majority of
the Board of Trustees of the Investment Company (the "Board"), including a
majority of the Board members who are not interested persons of the Investment
Company and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Board members"), cast in person at a meeting
called for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit each Fund and its Class 2
shareholders.
DISTRIBUTION PLAN
1. Each Fund shall pay Distributors, the Insurance Companies or others for
activities primarily intended to sell Class 2 shares or Variable Contracts
offering Class 2 shares. Payments made under the Plan may be used for, among
other things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts. Payments made
under the Plan may also be used to pay Insurance Companies, dealers or others
for, among other things, service fees as defined under NASD rules, furnishing
personal services or such other enhanced services as a Fund or a Variable
Contract may require, or maintaining customer accounts and records. Agreements
for the payment of fees to the Insurance Companies or others shall be in a form
which has been approved from time to time by the Board, including the
non-interested Board members.
2. The maximum amount which may be paid by each Fund shall be a percentage, as
indicated on Schedule A, per annum of the average daily net assets represented
by shares of the Fund's Class 2. These payments shall be made quarterly by each
Fund to Distributors, the Insurance Companies or others. Expenses in excess of
these maximum annual rates that otherwise qualify for payment shall not be
carried forward into successive annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to a Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 2 shares of any Fund at any time, without
penalty, by vote of a majority of the outstanding Class 2 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Management Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by any Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 2 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 2 shares of each Fund, and
Distributors as evidenced by their execution hereof.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:
Charles E. Johnson
President
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
Gregory E. Johnson
President
_____, 1999
TEMPLETON VARIABLE PRODUCTS SERIES FUND
CLASS 2 DISTRIBUTION PLAN
Schedule A
The following are the maximum amounts each Fund may pay under the accompanying
Class 2 Distribution Plan, stated as a percentage per year of Class 2's average
daily net assets represented by shares of Class 2.
FUND NAME MAXIMUM ANNUAL PAYMENT RATE
TEMPLETON ASSET ALLOCATION FUND 0.25%
TEMPLETON BOND FUND 0.15%
TEMPLETON DEVELOPING MARKETS FUND 0.25%
TEMPLETON INTERNATIONAL FUND 0.25%
TEMPLETON STOCK FUND 0.25%
FRANKLIN GROWTH INVESTMENTS FUND 0.25%
FRANKLIN S&P 500 INDEX FUND 0.25%
FRANKLIN SMALL CAP INVESTMENTS FUND 0.25%
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND 0.25%
MUTUAL SHARES INVESTMENTS FUND 0.25%
CLASS 3 DISTRIBUTION PLAN
I. Investment Company: TEMPLETON VARIABLE PRODUCTS SERIES FUND
II. Fund: FRANKLIN S&P 500 INDEX FUND
PREAMBLE TO CLASS 3 DISTRIBUTION PLAN
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("Investment Company") is an open-end
management investment company organized as a Massachusetts business trust, which
offers the shares of beneficial interest of its series, including the Franklin
S&P 500 Index Fund (the "Fund"), to certain life insurance companies ("Insurance
Companies") for allocation to certain of their separate accounts established for
the purpose of funding variable annuity contracts and variable life insurance
policies (collectively, "Variable Contracts") and shares of the Fund to employee
benefit, pension and other plans meeting the requirements for qualification
under section 401(k) of the Internal Revenue Code ("401(k) Plans").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 3 (the "Class") shares of the Fund named above, which Plan
shall take effect on the date Class 3 shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of the
Board of Trustees of the Investment Company (the "Board"), including a majority
of the Board members who are not interested persons of the Investment Company
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a meeting called
for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its Class 3
shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay Distributors, the Insurance Companies or others for
activities primarily intended to sell Class 3 shares or Variable Contracts
offering Class 3 shares. Payments made under the Plan may be used for, among
other things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts. Payments made
under the Plan may also be used to pay Insurance Companies, dealers, 401(k) Plan
record keeping and servicing agents, or others for, among other things, service
fees as defined under NASD rules, furnishing personal services or such other
enhanced services as the Fund or a Variable Contract may require, or maintaining
customer accounts and records. Agreements for the payment of fees to the
Insurance Companies or others shall be in a form which has been approved from
time to time by the Board, including the non-interested Board members.
2. The maximum amount which may be paid by the Fund shall be a percentage, as
indicated on Schedule A, per annum of the average daily net assets represented
by shares of the Fund's Class 3. These payments shall be made quarterly by the
Fund to Distributors, the Insurance Companies or others. Expenses in excess of
these maximum annual rates that otherwise qualify for payment shall not be
carried forward into successive annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to the Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 3 shares of any Fund at any time, without
penalty, by vote of a majority of the outstanding Class 3 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Management Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by any Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 3 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 3 shares of the Fund, and
Distributors as evidenced by their execution hereof.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:
Charles E. Johnson
President
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
Gregory E. Johnson
President
______, 1999
TEMPLETON VARIABLE PRODUCTS SERIES FUND
CLASS 3 DISTRIBUTION PLAN
Schedule A
The following are the maximum amounts the Fund may pay under the accompanying
Class 3 Distribution Plan, stated as a percentage per year of Class 3's average
daily net assets represented by shares of Class 3.
FUND NAME MAXIMUM ANNUAL PAYMENT RATE
FRANKLIN S&P 500 INDEX FUND 0.25%
TEMPLETON VARIABLE PRODUCTS SERIES FUND
on behalf of
TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON STATEGIC INCOME INVESTMENTS FUND
TEMPLETON STOCK FUND
FRANKLIN S&P 500 INDEX FUND
FRANKLIN GROWTH INVESTMENTS FUND
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
MUTUAL SHARES INVESTMENTS FUND
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Trustees of Templeton Variable Products Series Fund (the "Investment
Company") on behalf of each series named above (each, a "Multi-Class Fund"). The
Board has determined that the Plan is in the best interests of each class of
each Fund and of the Investment Company as a whole. The Plan sets forth the
provisions relating to the establishment of multiple classes of shares
("Shares") of the Multi-Class Funds.
1. Each Multi-Class Fund with the exception of Franklin S&P 500 Index Fund
shall offer two classes of shares, to be known as Class 1 and Class 2 Shares.
The Franklin S&P 500 Index Fund shall offer three classes of shares, to be known
as Class 1, Class 2 and Class 3 Shares.
2. All Shares shall be sold solely to certain life insurance company
("Insurance Company") variable accounts for the purpose of funding certain
variable annuity and variable life insurance contracts ("Variable Contracts")
and to such other investors as are determined to be eligible to purchase Shares.
In addition, Class 3 Shares may be sold to employee benefit, pension or other
plans meeting the requirements for qualification under section 401(k) of the
Internal Revenue Code ("401(k) Plans"). None of the Classes of Shares shall be
subject to any front-end or deferred sales charges.
3. The Distribution Plans adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Rule 12b-1
Plans") associated with the Class 2 and Class 3 Shares may be used to pay
Franklin/Templeton Distributors, Inc. ("Distributors"), the Insurance Companies
or others to assist in the promotion and distribution of Class 2 and Class 3
Shares or Variable Contracts offering Class 2 Shares and Class 3 Shares.
Payments made under the Plans may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution-related
expenses, including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these Variable
Contracts or Shares of the Funds. Payments made under the Plans may also be used
to pay Insurance Companies, dealers, and with respect to Class 3 Shares, 401(k)
Plan record keeping and servicing agents, or others for, among other things,
furnishing personal services and maintaining customer accounts and records, or
as service fees as defined under NASD rules. Agreements for the payment of fees
to the Insurance Companies or others shall be in a form which has been approved
from time to time by the Board, including the non-interested Board members. In
addition, payments made under the Plan may be used to pay recordkeeping and
sub-shareholder servicing expenses incurred by administrators or related persons
of 401(k) plans.
The Investment Company has not adopted any Rule 12b-1 Plan for Class 1
shares.
4. Currently, the differences between Class 1, Class 2, and Class 3 Shares
are that the Class 2 and 3 Shares, but not the Class 1 Shares have a Rule 12b-1
Plan, only the Franklin S&P 500 Fund offers the Class 3 Shares, only the Class 3
Shares are sold to 401(k) Plans, and the expenses differ among the Classes.
5. Currently, there are no conversion features associated with the Class 1,
Class 2, and Class 3 Shares.
6. Shares of a class may be exchangeable for Shares of the same or
different classes of another series of the Investment Company or of another
underlying investment company according to the terms and conditions related to
transfer privileges set forth in the Variable Contract prospectuses and
documents governing the 401(k) Plans, as they may be amended from time to time.
7. Each Class will vote separately with respect to any Rule 12b-1 Plan
related to that Class.
8. On an ongoing basis, the Investment Company's Board members, pursuant to
their fiduciary responsibilities under the 1940 Act and otherwise, will monitor
the Multi-Class Funds for the existence of any material conflicts between the
interests of the various classes of shares. The Board members, including a
majority of the Board members who are not interested persons of the Investment
Company as defined by the Act, shall take such action as is reasonably necessary
to eliminate any such conflict that may develop. The investment advisers of each
Multi-Class Fund and Distributors shall be responsible for alerting the Board to
any material conflicts that arise.
9. All material amendments to this Plan must be approved by a majority of
the Investment Company's Board members, including a majority of the Board
members who are not interested persons of the Investment Company as defined by
the Act.
10. I, Barbara J. Green, Secretary of Templeton Variable Products Series
Fund, do hereby certify that this Multiple Class Plan was adopted by the Board
of Trustees of the Investment Company on ______ ____, 1999.
-------------------------------
Barbara J. Green, Secretary
