As filed with the Securities and Exchange Commission on December 20, 1999
Securities Act File No. 33-23493
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[x] Post-Effective Amendment No. 1
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(Exact Name of Registrant as Specified in Charter)
(800) 342-3863
(Area Code and Telephone Number)
777 Mariners Island Boulevard
San Mateo, California 94404
(Addresses of Principal Executive Offices) (Zip Code)
KAREN SKIDMORE, ESQ.
777 Mariners Island Boulevard
San Mateo, California 94404
(Name and Address of Agent for Service)
COPIES TO:
JOAN E. BOROS, ESQ.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Suite 400 East
Washington, D.C. 20007
Approximate Date of Proposed Public Offering: December 20, 1999
The title of the securities being registered is shares of series of the
Franklin Templeton Variable Insurance Products Trust. No filing fee is due
in reliance on Section 24(f) of the Investment Company Act of 1940.
IMPORTANT INFORMATION REGARDING
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Large Cap Growth Investments Fund (previously the Franklin Growth
Investments Fund)
Franklin Small Cap Investments Fund
Mutual Shares Investments Fund
Templeton Asset Allocation Fund
Templeton Bond Fund
Templeton Developing Markets Fund
Templeton International Fund
Templeton Stock Fund
Franklin S&P 500 Index Fund
Franklin Strategic Income Investments Fund
A special meeting of shareholders of the Templeton Variable Products
Series Fund (the TVP Trust) will be held at the offices of the TVP Trust
located at 500 East Broward Blvd., Fort Lauderdale, Florida, 33394-3091 on
February 8, 2000 at 3:00 p.m., Eastern time. The combined proxy
statement/prospectus discusses the reorganization of the TVP Trust with the
Franklin Templeton Variable Insurance Products Trust (VIP Trust). Shareholders
of the TVP Trust are being asked to vote on certain reorganization matters and
shareholders of the VIP Trust are being asked to vote on other reorganization
matters. As a contract owner, you will also receive a voting instruction card
for each fund whose voting privileges are attributed to you. We request that
you review the enclosed materials and send us the completed enclosed voting
instruction card(s).
WHAT WILL BE DECIDED AT THE MEETING?
This meeting is critically important as you are being asked to consider
and approve a reorganization to eliminate duplicate funds by combining each
fund of the TVP Trust (TVP Fund) with a corresponding fund of the VIP Trust
(VIP Fund). Each TVP Fund is named below next to its corresponding VIP Fund:
<TABLE>
<CAPTION>
TVP FUNDS VIP FUNDS
--------- ---------
<S> <C>
Franklin Large Cap Growth Investments Fund* Franklin Large Cap Growth Securities Fund**
Franklin Small Cap Investments Fund Franklin Small Cap Fund
Mutual Shares Investments Fund Mutual Shares Securities Fund
Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund
Templeton Bond Fund Templeton Global Income Securities Fund
Templeton Developing Markets Fund Templeton Developing Markets Equity Fund
Templeton International Fund Templeton International Equity Fund
Templeton Stock Fund Templeton Global Growth Fund
Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New)
Franklin Strategic Income Investments Fund Franklin Strategic Income Securities Fund (New)
</TABLE>
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* Previously named the Franklin Growth Investments Fund
**Previously named the Franklin Capital Growth Fund
If the reorganization is approved, the separate accounts of your insurance
company will receive shares of the corresponding VIP Fund equal in value to the
shares held in the TVP Funds. The TVP Trust and the VIP Trust issue class 1 and
class 2 shares (and class 3 shares of Franklin S&P 500 Index Fund). The
separate accounts of your insurance company holding class 1 shares of each TVP
Fund will receive class 1 shares of the corresponding VIP Fund. Likewise, the
separate accounts of your insurance company holding class 2 shares of each TVP
Fund will receive class 2 shares of the corresponding VIP Fund. The employee
benefit plans holding class 3 shares of TVP Franklin S&P 500 Index Fund will
receive class 3 shares of VIP Franklin S&P 500 Index Fund. The reorganization
will not affect your contract rights. After the reorganization, your contract
values will depend on the performance of the combined funds instead of that of
the current TVP Funds.
FTVIP PXY 1299
<PAGE>
WHY IS THE REORGANIZATION BEING PROPOSED?
In 1992, the Franklin and Templeton organizations joined forces. Prior to
this time, Franklin and Templeton had two separate trusts offering mutual funds
dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP
Trust and the VIP Trust include a number of substantially similar mutual funds
generally having the same investment objectives and very similar investment
policies and strategies. In most cases, the portfolio managers are also the
same. The duplicate funds and related expenses have no clear benefits to
shareholders. To eliminate this duplication, we are proposing the
reorganization in which the TVP Funds will be combined with the VIP Funds.
WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION?
In the reorganization, each TVP Fund will be combined with the
corresponding VIP Fund and become part of the VIP Trust. This combined fund
will have most of the features of the larger corresponding fund (see chart
below) except each combined fund will have the same fundamental investment
restrictions as the corresponding VIP Fund. This means that each combined fund
will have the same investment objectives, policies and strategies of the larger
corresponding fund. After the reorganization the TVP Trust will be dissolved.
In addition, each combined fund will have the same investment adviser as the
larger fund. The larger funds are as follows:
LARGER FUNDS TRUST
------------ -----
Franklin Large Cap Growth Securities Fund VIP Trust
Franklin Small Cap Fund VIP Trust
Mutual Shares Securities Fund VIP Trust
Templeton Asset Allocation Fund TVP Trust
Templeton Global Income Securities Fund VIP Trust
Templeton Developing Markets Fund TVP Trust
Templeton International Fund TVP Trust
Templeton Global Growth Fund VIP Trust
Franklin S&P 500 Index Fund TVP Trust
Franklin Strategic Income Investments Fund TVP Trust
HOW DO THE IMPORTANT FEATURES OF THE FUNDS COMPARE?
The corresponding funds generally have the same investment objectives and
very similar investment policies and strategies. As a result, the corresponding
funds have substantially similar risk factors. In most cases, the portfolio
managers are also the same. Thus, the important features of the TVP Funds
compared to those of the corresponding VIP Funds are nearly identical.
HOW CAN I VOTE ON THE REORGANIZATION?
You will be able to give your insurance company voting instructions for
those shares attributable to your contract as of the record date for the
special meeting, November 30, 1999. A voting instruction card is, in essence, a
ballot. While only insurance companies are the shareholders of the funds, these
insurance companies will vote in accordance with your instructions. When you
complete your voting instruction card, it tells your insurance company how to
vote its proxy on important issues relating to the portion of your contract
that is allocated to the TVP Trust. If you complete and sign the voting
instruction card, the shares will be voted exactly as you instruct. If you
simply sign the voting instruction card without otherwise completing it, the
shares will be voted for the reorganization. If you do not return a voting
instruction card at all, the shares will be voted in the same proportion as
shares for which instructions have been received by your insurance company from
other owners of registered variable annuity and variable life insurance
contracts. If you return your voting instruction card and mark it abstain,
shares attributable to your contract will be treated as votes not cast.
Abstentions have the same effect as a negative vote.
The shareholders of each TVP Fund will vote separately on proposal 1 and
have their own voting instruction. Each class of shareholders of each fund will
vote together as a single class, except that the
<PAGE>
shareholders of the class 1 and class 2 shares of the TVP Templeton Bond Fund
will vote separately. The voting instructions for each TVP Funds will ask for
the approval of the combination of that TVP Fund with the corresponding VIP
Fund.
BECAUSE EACH FUND HAS ITS OWN VOTING INSTRUCTIONS, YOU MAY RECEIVE
MORE THAN ONE INSTRUCTION CARD.
Please review the combined proxy statement/prospectus for more detailed
information about the reorganization. Included with the combined proxy
statement/prospectus, are the prospectuses for the VIP Funds. Please note that
the accompanying prospectuses may include VIP Funds and classes that do not
correspond to the TVP Funds that are available under your contract. After
reviewing this information, please fill out your voting instruction card and
return it. We want to know how you would like to vote and welcome your
comments. If you have any questions, call 1-800-342-3863.
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TEMPLETON VARIABLE PRODUCTS SERIES FUND
BROWARD FINANCIAL CENTRE
500 EAST BROWARD BOULEVARD
FORT LAUDERDALE, FLORIDA 33394-3091
To Shareholders:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of the
Templeton Variable Products Series Fund (the TVP Trust) will be held at Broward
Financial Centre, 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091, on February 8, 2000, at 3:00 p.m. (Eastern time) for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization between the TVP
Trust and Franklin Templeton Variable Insurance Products Trust (VIP Trust),
which provides that:
o The TVP Trust transfer all of its assets and liabilities to the VIP
Trust;
o The VIP Trust issue shares of its funds (VIP Funds) which correspond
to the funds of the TVP Trust (TVP Funds) in exchange for the TVP
Trust's assets and liabilities;
o The TVP Trust distribute shares of the corresponding VIP Funds to
shareholders of the TVP Trust; and
o The TVP Trust will be dissolved,
as described more fully in the combined proxy statement/prospectus.
<TABLE>
<S> <C>
TVP FUNDS VIP FUNDS
--------- ---------
Franklin Large Cap Growth Investments Fund* Franklin Large Cap Growth Securities Fund**
Franklin Small Cap Investments Fund Franklin Small Cap Fund
Mutual Shares Investments Fund Mutual Shares Securities Fund
Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund
Templeton Bond Fund Templeton Global Income Securities Fund
Templeton Developing Markets Fund Templeton Developing Markets Equity Fund
Templeton International Fund Templeton International Equity Fund
Templeton Stock Fund Templeton Global Growth Fund
Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New)
Franklin Strategic Income Investments Fund Franklin Strategic Income Securities Fund (New)
</TABLE>
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* Previously named the Franklin Growth Investments Fund
** Previously named the Franklin Capital Growth Fund
Shareholders of each TVP Fund will vote separately on proposal 1 for each
TVP Fund. Shareholders of each class of the TVP Templeton Bond Fund will vote
separately on proposal 1.
(2) To transact such other business as may properly come before the
special meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF THE TVP TRUST UNANIMOUSLY RECOMMENDS THAT YOU
VOTE TO APPROVE THE PROPOSED REORGANIZATION AS TO EACH TVP FUND.
The Board of Trustees has fixed the close of business on November 30,
1999, as the record date for the determination of shareholders entitled to
notice of, and to vote at, the special meeting. Each
<PAGE>
shareholder who does not expect to attend the special meeting in person is
requested to date, fill in, sign and return promptly the enclosed Form of Proxy
in the enclosed envelope, which needs no postage if mailed in the United
States. Insurance company separate accounts that invest in the TVP Trust shares
should complete the Form of Proxy. If a portion of your contract is allocated
to the accounts of insurance companies that invest in the TVP Trust shares, you
should complete and return the enclosed Voting Instructions Form in the
enclosed envelope.
Please review the enclosed combined proxy statement/prospectus for
additional information regarding the reorganization.
By Order of the Board of the Trustees,
Barbara J. Green, Secretary
December 20 , 1999
YOUR PROMPT ATTENTION TO THE ENCLOSED FORM OF PROXY OR VOTING INSTRUCTIONS
FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
<PAGE>
IMPORTANT INFORMATION REGARDING
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Global Asset Allocation Fund
Templeton Developing Markets Equity Fund
Templeton International Equity Fund
A special meeting of shareholders of the Templeton Global Asset Allocation
Fund, Templeton Developing Markets Equity Fund and Templeton International
Equity Fund of the Franklin Templeton Variable Insurance Products Trust (the
VIP Trust) will be held at the offices of the VIP Trust located at 777 Mariners
Island Boulevard, San Mateo, California 94404 on February 8, 2000 at 11:00
a.m., Pacific time. The combined proxy statement/prospectus discusses a
reorganization of the VIP Trust and the Templeton Variable Products Series Fund
(the TVP Trust). Shareholders of the TVP Trust are being asked to vote on
certain reorganization matters and shareholders of the VIP Trust are being
asked to vote on other reorganization matters. As a contract owner, you will
also receive a voting instruction card for each fund whose voting privileges
are attributed to you. We request that you review the enclosed materials and
send us the completed enclosed voting instruction card(s).
WHY IS THE REORGANIZATION BEING PROPOSED?
In 1992, the Franklin and Templeton organizations joined forces. Prior to
this time, Franklin and Templeton had two separate trusts offering mutual funds
dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP
Trust and the VIP Trust include a number of substantially similar mutual funds
generally having the same investment objectives and very similar investment
policies and strategies. In most cases, the portfolio managers are also the
same. The duplicate funds and related expenses have no clear benefits to
shareholders. To eliminate this duplication, we are proposing the
reorganization in which the funds of the TVP Trust (TVP Funds) will be combined
with the funds of the VIP Trust (VIP Funds).
WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION?
In the reorganization, each TVP Fund will be combined with the
corresponding VIP Fund and become part of the VIP Trust. This combined fund
will have most of the features of the larger corresponding fund. This means
that the combined fund will have the same investment objectives, policies and
strategies of the larger corresponding fund. In addition, the combined fund
will have the same investment adviser as the larger fund. The VIP Templeton
Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and
the VIP Templeton International Equity Fund are smaller than the corresponding
TVP Funds. To preserve the features of the three larger TVP Funds for the
combined funds, the shareholders of the VIP Templeton Global Asset Allocation
Fund, VIP Templeton Developing Markets Equity Fund and the VIP Templeton
International Equity Fund must vote to approve (1) new investment advisory
agreements and (2) changes to these funds' fundamental investment restrictions
to be more similar to those of the larger corresponding TVP Funds.
WHAT WILL BE DECIDED AT THE MEETING?
This meeting is critically important. Shareholders of the Templeton Global
Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton
International Equity Fund are being asked to consider and approve (1) the
adoption of proposed investment advisory agreement for each fund; (2) the
amendment of certain fundamental investment restrictions for each fund; and (3)
the elimination of certain fundamental investment restrictions for each fund.
HOW CAN I VOTE ON THE PROPOSALS?
You will be able to give your insurance company voting instructions for
those shares attributable to your contract as of the record date for the
special meeting, November 30, 1999. A voting
<PAGE>
instruction card is, in essence, a ballot. While only insurance companies are
the shareholders of the funds, these insurance companies will vote in
accordance with your instructions. When you complete your voting instruction
card, it tells your insurance company how to vote its proxy on important issues
relating to the portion of your contract that is allocated to the VIP Trust. If
you complete and sign the voting instruction card, the shares will be voted
exactly as you instruct. If you simply sign the voting instruction card without
otherwise completing it, it will be voted FOR the reorganization. If you do not
return a voting instruction card at all, the shares will be voted in the same
proportion as shares for which instructions have been received from other
owners of registered variable annuity and variable life insurance contracts. If
you return your voting instruction card and mark it abstain, shares
attributable to your contract will be treated as votes not cast. Abstentions
have the same effect as a negative vote.
The shareholders of each VIP Fund will vote separately on proposals 2 and
4 and on each sub-proposal of proposal 3. Each VIP Fund will have its own
voting instruction. The shareholders of class 1 and class 2 shares of each VIP
Fund will vote together as a single class.
BECAUSE EACH FUND HAS ITS OWN VOTING INSTRUCTIONS, YOU MAY RECEIVE MORE
THAN ONE INSTRUCTION CARD.
Please review the combined proxy statement/prospectus for more detailed
information about the reorganization. Then, fill out your voting instruction
card and return it. We want to know how you would like to vote and welcome your
comments. If you have any questions, call 1-800/342-3863.
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Global Asset Allocation Fund
Templeton Developing Markets Equity Fund
Templeton International Equity Fund
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
1-(800) 342-3863
To Shareholders:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of the
Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity
Fund and Templeton International Equity Fund of the Franklin Templeton Variable
Insurance Products Trust (the VIP Trust) will be held at the offices of the VIP
Trust located at 777 Mariners Island Boulevard, San Mateo, California 94404 on
February 8, 2000 at 11:00 a.m., Pacific time to vote on the following
proposals, which do not include Proposal 1:
PROPOSAL 2. To approve the adoption of new investment advisory agreements for
the Templeton Global Asset Allocation Fund, Templeton Developing
Markets Equity Fund and Templeton International Equity Fund, as
described more fully in the combined proxy statement/prospectus.
PROPOSAL 3. To approve changes in the following fundamental investment
restrictions for the Templeton Global Asset Allocation Fund,
Templeton Developing Markets Equity Fund and Templeton International
Equity Fund, as described more fully in the combined proxy
statement/prospectus.
(a) Modification of fundamental investment restriction regarding
Diversification.
(b) Modification of fundamental investment restriction regarding
Borrowing.
(c) Modification of fundamental investment restriction regarding
Lending.
(d) Modification of fundamental investment restriction regarding
Underwriting.
(e) Modification of fundamental investment restriction regarding
Concentration.
(f) Modification of fundamental investment restriction regarding
Senior Securities.
(g) Modification of fundamental investment restrictions regarding
Real Estate and Commodities, which would combine these two
separate fundamental restrictions.
PROPOSAL 4. To approve the elimination of certain fundamental investment
restrictions for the Templeton Global Asset Allocation Fund,
Templeton Developing Markets Equity Fund and Templeton International
Equity Fund, as described more fully in the combined proxy
statement/prospectus.
OTHER BUSINESS To vote upon any other business as may properly come before
the special meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF THE VIP TRUST UNANIMOUSLY RECOMMENDS THAT YOU
VOTE TO APPROVE THE PROPOSED PROPOSALS IN CONNECTION WITH THE REORGANIZATION AS
TO EACH VIP FUND.
The Board of Trustees has fixed the close of business on November 30,
1999, as the record date for the determination of shareholders entitled to
notice of, and to vote at, the special meeting. Each shareholder who does not
expect to attend the special meeting in person is requested to date, fill in,
sign and return promptly the enclosed Form of Proxy in the enclosed envelope,
which needs no
<PAGE>
postage if mailed in the United States. Insurance company separate accounts
that invest in the VIP Trust shares should complete the Form of Proxy. If a
portion of your contract is allocated to the accounts of insurance companies
that invest in the VIP Trust shares, you should complete and return the
enclosed Voting Instructions Form in the enclosed envelope.
Please review the enclosed combined proxy statement/prospectus for
additional information regarding the proposal in connection with the
reorganization.
By Order of the Board of the Trustees,
Deborah R. Gatzek, Secretary
December 20, 1999
YOUR PROMPT ATTENTION TO THE ENCLOSED FORM OF PROXY OR VOTING INSTRUCTIONS
FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS DATED DECEMBER 20, 1999
<TABLE>
<S> <C>
TEMPLETON VARIABLE PRODUCTS SERIES FUND FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
500 East Broward Boulevard 777 Mariners Island Boulevard
Fort Lauderdale, Florida 33394-3091 San Mateo, California 94404
1-(800) 774-5001 1-(800) 342-3863
</TABLE>
We are proposing a reorganization of the Templeton Variable Products
Series Fund (TVP Trust) and the Franklin Templeton Variable Insurance Products
Trust (VIP Trust). In the reorganization, each TVP Fund will be combined with
the corresponding VIP Fund and become part of the VIP Trust. After the
reorganization the TVP Trust will be dissolved. As part of the reorganization,
the VIP Trust will create two new funds. In addition, as part of the
reorganization, three VIP Funds will adopt new investment advisory agreements
and will change their fundamental investment restrictions. To complete the
reorganization as proposed, we need the approval of a majority of:
o All shareholders of the TVP Trust at a meeting on February 8, 2000 at
3:00 p.m. Eastern time at the offices of the TVP Trust at the above
address; and
o The shareholders of the VIP Trust Templeton Global Asset Allocation
Fund, Templeton Developing Markets Equity Fund and Templeton
International Equity Fund at a meeting on February 8, 2000 at 11:00
a.m., Pacific time at the offices of the VIP Trust at the above
address.
The corresponding funds of each Trust (TVP Funds and VIP Funds) are set
forth below.
<TABLE>
<S> <C>
TVP FUNDS VIP FUNDS
--------- ---------
Franklin Large Cap Growth Investments Fund* Franklin Large Cap Growth Securities Fund**
Franklin Small Cap Investments Fund Franklin Small Cap Fund
Mutual Shares Investments Fund Mutual Shares Securities Fund
Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund
Templeton Bond Fund Templeton Global Income Securities Fund
Templeton Developing Markets Fund Templeton Developing Markets Equity Fund
Templeton International Fund Templeton International Equity Fund
Templeton Stock Fund Templeton Global Growth Fund
Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New)
Franklin Strategic Income Investments Fund Franklin Strategic Income Securities Fund (New)
- ----------------
</TABLE>
* Previously named the Franklin Growth Investments Fund
** Previously named the Franklin Capital Growth Fund
Currently, only separate accounts of insurance companies are the
shareholders of the class 1 and class 2 shares of the Trusts. In addition,
employee benefit plans are the shareholders of the class 3 shares of the TVP
Franklin S&P 500 Index Fund. We expect to send this document to shareholders on
or about December 20, 1999. The insurance companies must vote as instructed by
owners of registered variable annuity and variable life insurance contracts
whose contracts will be affected by the reorganization. Plan sponsors and
participants may vote only if specified by the relevant employee benefit plan.
On or about December 20, 1999, you will be sent this document to give your
voting instruction to an insurance company or plan sponsor.
This document gives you important information on the reorganization and
the VIP Funds that you ought to know before giving your voting instructions.
You should keep this document for future reference. Additional information is
contained in the statement of additional information dated December 9, 1999. It
is incorporated by reference and is legally a part of this document.
i
<PAGE>
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR
DISAPPROVED THE SHARES OF THE VIP FUNDS AND HAS NOT PASSED ON THE ACCURACY OR
THE ADEQUACY OF THIS DOCUMENT. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A
FEDERAL CRIME.
You can obtain additional information about the reorganization and the VIP
Funds in:
o The VIP Trust's most recent annual report, dated December 31, 1998.
o The VIP Trust's most recent semi-annual report, dated June 30, 1999.
o The prospectuses for the VIP Funds which are attached as Exhibit VI.
Please note that the accompanying prospectuses may include VIP Funds
and classes that are not available to you.
o The statement of additional information dated December 9, 1999, for
this combined proxy statement/prospectus.
o The VIP Trust's statement of additional information dated May 1, 1999,
as supplemented December 16, 1999, which is incorporated by reference
in the statement of additional information for this combined proxy
statement/prospectus.
You can obtain information about the TVP Funds from the prospectuses for the
TVP Funds and from the statement of additional information for the TVP Funds.
These documents are also on file with the SEC. The documents for the TVP Funds
and the documents listed above are legally a part of this document. You can
obtain them from us without charge by calling us at 1-800/342-3863 or writing
us at 777 Mariners Island Boulevard, San Mateo, California 94404. They are also
available from the SEC's public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the SEC's regional offices or the SEC's website
(http://www.sec.gov). You will have to pay the rates determined by the SEC. In
addition, the TVP Trust and the VIP Trust are required to file reports and
other information with the SEC. You can obtain these reports, proxy statements
and other information at the SEC's public reference facilities, the SEC's
regional offices or the SEC's website.
SHARES OF THE VIP FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY BANK. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE VIP
FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY ................................................................................. 1
Why are we proposing the reorganization? ............................................... 1
What is happening in the reorganization? ............................................... 1
What happens to the funds after the reorganization? .................................... 2
Who is eligible to vote? ............................................................... 3
On what matters am I giving voting instructions? ....................................... 3
Why am I giving voting instructions? ................................................... 4
What vote is required? ................................................................. 5
How do the TVP and VIP Trustees recommend I vote? ...................................... 5
Can I revoke my voting instructions? ................................................... 5
How do the important features of the funds compare? .................................... 5
How do the expenses of the funds compare? .............................................. 6
How does the performance of the funds compare? ......................................... 13
How will the reorganization affect me? ................................................. 15
What happens after the reorganization if my insurance company currently invests in a
TVP Fund? ............................................................................ 15
What happens after the reorganization if my insurance company currently invests in a
VIP Fund? ............................................................................ 15
Will dividends be changed? ............................................................. 15
How are shares bought or sold? ......................................................... 15
What are the tax consequences? ......................................................... 15
PROPOSAL 1: COMBINATION OF THE TVP FUNDS WITH THE VIP FUNDS ............................. 16
Comparison of the Risk Factors .......................................................... 16
Are the risk factors for the corresponding TVP and VIP Funds substantially
the same? ............................................................................ 16
What are the principal risk factors? ................................................... 17
Comparison of the Investment Objectives and Policies of the Funds ....................... 21
Are the investment objectives and policies for the corresponding TVP and VIP Funds
substantially the same? .............................................................. 21
What are the funds' investment objectives and principal policies? ...................... 22
Comparison of the Management of the Funds ............................................... 24
Is the management of the corresponding funds the same? ................................. 24
Who are the funds' investment advisers? ................................................ 25
Comparison of Fees and Expenses of the Funds ............................................ 27
PROPOSAL 2: NEW INVESTMENT ADVISORY AGREEMENTS FOR THE VIP TEMPLETON GLOBAL ASSET
ALLOCATION FUND, VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND AND VIP TEMPLETON
INTERNATIONAL EQUITY FUND .............................................................. 29
Will the management change for the VIP Funds with new investment advisory
agreements? .......................................................................... 29
What are the terms of the existing and proposed contracts for the VIP Funds? ........... 29
What fees do the investment advisers receive from funds similar to the VIP Funds? ...... 34
REASONS FOR PROPOSALS 1 AND 2 ........................................................... 34
Why are we proposing the reorganization? ............................................... 34
What factors did the TVP Trustees consider prior to recommending approval of
reorganization? ...................................................................... 34
What factors did the VIP Trustees consider? ............................................ 37
INFORMATION ABOUT THE REORGANIZATION .................................................... 38
How will the reorganization work? ...................................................... 38
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
How will the shares be exchanged and distributed? ....................................... 39
What will happen with the TVP Franklin S&P 500 Index Fund and the TVP Franklin
Strategic Income Investments Fund? .................................................... 39
Can the reorganization be delayed or terminated? ........................................ 39
What are the tax consequences? .......................................................... 39
Who will pay the expenses? .............................................................. 40
How would the reorganization change the funds' statement of capital? .................... 40
PROPOSALS 3 & 4 -- CHANGES TO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE VIP
TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND
AND TEMPLETON INTERNATIONAL EQUITY FUND ................................................. 43
Why are we proposing amendments to or eliminating certain fundamental investment
restrictions? ......................................................................... 43
PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUNDS' FUNDAMENTAL
INVESTMENT RESTRICTIONS ................................................................. 44
Sub-Proposal 3a: To amend each fund's fundamental investment restriction regarding
diversification of investments. ....................................................... 44
What effect will the change in the current investment diversification restriction have
on the funds? ........................................................................ 44
Sub-Proposal 3b: To amend each fund's fundamental investment restriction regarding
borrowing. ............................................................................ 45
What effect will the change in the current borrowing restriction have on a fund? ....... 45
Sub-Proposal 3c: To amend the funds' fundamental investment restriction regarding
lending. .............................................................................. 45
What effect will standardization of the current lending restriction have on the funds? 46
Sub-Proposal 3d: To amend each fund's fundamental investment restriction regarding
underwriting. ......................................................................... 46
What effect will changing the current underwriting restriction have on the funds? ...... 46
Sub-Proposal 3e: To amend each fund's fundamental investment restrictions regarding
investments in real estate and commodities. ........................................... 46
What effect will combining and revising the real estate and commodities restrictions
have on the funds? ................................................................... 47
Sub-Proposal 3f: To amend each fund's fundamental investment restriction regarding
issuing senior securities. ............................................................ 47
What effect will amending the restriction regarding issuing senior securities have on
the funds? ........................................................................... 48
Sub-Proposal 3g: To amend each fund's fundamental investment restriction regarding
concentration of the fund's investments in the same industry. ......................... 48
What effect will amending the current restriction regarding industry concentration
have on the funds? ................................................................... 48
PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF THE FUNDS' FUNDAMENTAL
INVESTMENT RESTRICTIONS ................................................................. 49
Which fundamental investment restrictions is the Board recommending that the funds
eliminate? ............................................................................ 49
Illiquid and Restricted Securities ..................................................... 49
Foreign Issuers ........................................................................ 50
Control or Management .................................................................. 50
Unseasoned Companies ................................................................... 50
Securities on Margin ................................................................... 50
Securities with Unlimited Liability .................................................... 51
Management Ownership of Securities ..................................................... 51
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Tax Diversification for Variable Annuity Funds .......................................... 51
Warrants ............................................................................... 51
Why are we recommending that the restrictions be eliminated? ............................ 52
What are the risks, if any, in eliminating the restrictions? ............................ 52
VOTING INFORMATION AND PRINCIPAL SHAREHOLDERS ............................................ 52
How are votes solicited? ................................................................ 52
What is a quorum? ....................................................................... 52
How are votes counted? .................................................................. 52
Can the meetings be adjourned? .......................................................... 53
How many shares are outstanding? ........................................................ 53
Who are the shareholders? ............................................................... 54
Annual Meetings and Special Meeting ..................................................... 61
THE VIP FUNDS' SERVICE PROVIDERS ......................................................... 61
Who provides administration services to the VIP Funds? .................................. 61
Who distributes shares of the VIP Trust? ................................................ 62
Who is the transfer agent of the VIP Trust? ............................................. 62
Who is the custodian of the VIP Trust? .................................................. 62
Who is the auditor of the VIP Trust? .................................................... 63
Financial Statements ..................................................................... 63
</TABLE>
v
<PAGE>
SUMMARY
This summary highlights some of the important information in this
document. This summary may not contain all of the information that is important
to you. To understand the reorganization, the related new investment advisory
agreements and revised fundamental investment restrictions, you should read
this entire document, including the exhibits.
WHY ARE WE PROPOSING THE REORGANIZATION?
In 1992, the Franklin and Templeton organizations joined forces. Prior to
this time, Franklin and Templeton had two separate trusts offering mutual funds
dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP
Trust and the VIP Trust include a number of substantially similar mutual funds
generally having the same investment objectives and very similar investment
policies and strategies. In most cases, the portfolio managers are also the
same. The duplicate funds and related expenses have no clear benefits to
shareholders. To eliminate this duplication, we are proposing the
reorganization.
WHAT IS HAPPENING IN THE REORGANIZATION?
The reorganization will be completed through two principal steps -
creating two new funds for the VIP Trust and eliminating duplicate funds. As
part of the reorganization, certain VIP Funds will adopt new investment
advisory agreements and will amend or eliminate some of their fundamental
investment restrictions.
To eliminate the duplicate funds, we propose that:
o The TVP Trust transfer all of its assets and liabilities to the VIP
Trust;
o The VIP Trust issue shares of the VIP Funds which correspond to the
TVP Funds in exchange for the TVP Trust's assets and liabilities;
o The TVP Trust distribute shares of the corresponding VIP Funds to
shareholders of the TVP Trust; and
o The TVP Trust be dissolved.
The corresponding funds of the TVP Trust and VIP Trust are set forth below.
<TABLE>
<CAPTION>
TVP FUNDS VIP FUNDS
--------- ---------
<S> <C>
Franklin Large Cap Growth Investments Fund* Franklin Large Cap Growth Securities Fund**
Franklin Small Cap Investments Fund Franklin Small Cap Fund
Mutual Shares Investments Fund Mutual Shares Securities Fund
Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund
Templeton Bond Fund Templeton Global Income Securities Fund
Templeton Developing Markets Fund Templeton Developing Markets Equity Fund
Templeton International Fund Templeton International Equity Fund
Templeton Stock Fund Templeton Global Growth Fund
Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New)
Franklin Strategic Income Investments Fund Franklin Strategic Income Securities Fund (New)
</TABLE>
- ----------------
* Previously named the Franklin Growth Investments Fund
** Previously named the Franklin Capital Growth Fund
1
<PAGE>
The VIP Trust will create the Franklin S&P 500 Index Fund and Franklin
Strategic Income Securities Fund. The advisory agreements, which will be
identical to the corresponding TVP Funds' agreements other than the signatory,
will have been approved prior to the reorganization.
We expect the reorganization to be completed around May 1, 2000. For some
funds, the reorganization may be delayed.
WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION?
In the reorganization, each TVP Fund will be combined with the
corresponding VIP Fund and become part of the VIP Trust. After the
reorganization, the TVP Trust will be dissolved. Each combined fund will have
most of the features of the larger corresponding fund (see chart below). All
combined funds will have the same fundamental investment restrictions as the
corresponding VIP Fund. However, we are asking the shareholders of the smaller
VIP Funds to approve changes to these VIP Funds' fundamental investment
restrictions to make them more like the larger corresponding TVP Funds. This
means that the combined fund will have the same investment objectives, policies
and strategies of the larger corresponding fund. In addition, the combined fund
will have the same investment adviser as the larger fund.
The larger funds are as follows:
LARGER FUNDS TRUST
------------ -----
Franklin Large Cap Growth Securities Fund VIP Trust
Franklin Small Cap Fund VIP Trust
Mutual Shares Securities Fund VIP Trust
Templeton Asset Allocation Fund VIP Trust
Templeton Global Income Securities Fund VIP Trust
Templeton Developing Markets Fund TVP Trust
Templeton International Fund TVP Trust
Templeton Global Growth Fund VIP Trust
Franklin S&P 500 Index Fund TVP Trust
Franklin Strategic Income Investments Fund TVP Trust
The VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing
Markets Equity Fund and the VIP Templeton International Equity Fund are smaller
than the corresponding TVP Funds. To preserve the features of the three larger
TVP Funds for the combined funds, the shareholders of the VIP Templeton Global
Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and the VIP
Templeton International Equity Fund must vote to approve (1) new investment
advisory agreements, and (2) changes to these funds' fundamental investment
restrictions to be more similar to those of the larger corresponding TVP Funds.
The new investment advisory agreements will be nearly the same as those
currently in effect for these VIP Funds, except that the VIP Templeton
Developing Markets Equity Fund and the VIP Templeton International Equity
Fund's investment advisory agreements will no longer provide for fund
administration services(1); and for each VIP Fund, the investment adviser will
be the same as that for the larger corresponding TVP Fund.
- ----------------
1 Fund administration services will be directly provided to the fund by the
same affiliate of the adviser currently indirectly providing such services.
2
<PAGE>
The potential impact on total operating expenses for the combined funds as
a result of the new investment advisory agreements is set forth below:
TOTAL EXPENSES HIGHER OR TOTAL EXPENSES HIGHER OR
COMBINATION LOWER THAN THE TVP FUND LOWER THAN THE VIP FUND
----------- ----------------------- -----------------------
Asset Allocation Very Slightly Higher Lower
Developing Markets Lower Moderately Higher
International Lower Lower
The slightly higher total fees for the combined Asset Allocation Fund over
those of the TVP Templeton Asset Allocation Fund are due to the change in the
basis on which fund administration services fees are calculated. The fund
administration services fees for the TVP Fund are currently based on the TVP
Trust's assets while those of the combined fund will be based on the combined
fund's assets. For the combined Developing Markets Fund, the increase is due to
the additional fund administration services fees that will be paid by the
combined fund. For the VIP Templeton Developing Markets Equity Fund, the fund
administration services fee is currently paid by the investment adviser out of
its fund management fee. The fund administration services fee will be paid
separately by the combined fund. While the total fund operating expenses of the
Asset Allocation and Developing Markets combined funds may potentially be
higher than those of current TVP Templeton Asset Allocation Fund or the VIP
Templeton Developing Markets Equity Fund, we believe that the reorganization
will provide other benefits from the combinations.
WHO IS ELIGIBLE TO VOTE?
In order to complete the reorganization as proposed, we need the approval
of a majority of:
o All shareholders of record as of the close of business on November 30,
1999 of the TVP Trust; and
o The shareholders of record as of the close of business on November 30,
1999 of the VIP Templeton Global Asset Allocation Fund, VIP Templeton
Developing Markets Equity Fund and VIP Templeton International Equity
Fund.
All shares of each fund will generally vote together as a single class.
The Investment Company Act of 1940 (1940 Act) requires classes to vote
separately in those cases where only the shareholders of a class will be
affected by a proposal. Shareholders of class 1 and class 2 shares of the TVP
Templeton Bond Fund will be asked to vote separately on approval of the
combination of this Fund with the corresponding VIP Fund. A separate vote by
the class 2 shareholders is needed because of the difference in the rule 12b-1
fee for the corresponding funds. For all other TVP Funds, all classes of
shareholders will vote together as a single class.
Each share is entitled to one vote. Shareholders may vote by executing a
proxy card. In this case, the proxy holders will vote the shares represented by
the proxy card as marked on the proxy card. If the proxy card is signed but the
voting portion is not completed, the proxy holders will vote the shares for the
proposals.
Currently, only separate accounts of insurance companies are the
shareholders of the class 1 and class 2 shares of the Trusts. In addition,
employee benefit plans are the shareholders of the class 3 shares of the TVP
Franklin S&P 500 Index Fund.
ON WHAT MATTERS AM I GIVING VOTING INSTRUCTIONS?
Shareholders of each TVP Fund must separately vote to approve the
reorganization of the TVP Fund with the VIP Fund. In addition, the shareholders
of the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets
Equity Fund and Templeton International Equity Fund must
3
<PAGE>
separately vote to approve (1) the proposed investment advisory agreement for
that VIP Fund; (2) the amendment of certain fundamental investment
restrictions; and (3) the elimination of certain fundamental investment
restrictions. No vote is required from the shareholders of the VIP Funds for
the combination of the corresponding funds. We have set forth the proposals
below.
<TABLE>
<CAPTION>
PROPOSAL 1 PROPOSAL 2 PROPOSAL 3(A)-(G) PROPOSAL 4
--------------- -------------- ------------------- -------------
AMENDING ELIMINATING
ADOPTING NEW CERTAIN CERTAIN
COMBINING INVESTMENT FUNDAMENTAL FUNDAMENTAL
CORRESPONDING ADVISORY INVESTMENT INVESTMENT
FUND FUNDS AGREEMENT RESTRICTIONS RESTRICTIONS
- ---------------------------------- --------------- -------------- ------------------- -------------
<S> <C> <C> <C> <C>
TVP Franklin Large Cap Growth
Investments Fund ............... X N/A N/A N/A
TVP Franklin Small Cap
Investments Fund ............... X N/A N/A N/A
TVP Mutual Shares
Investments Fund ............... X N/A N/A N/A
TVP Templeton Asset Allocation
Fund ........................... X N/A N/A N/A
TVP Templeton Bond Fund .......... X N/A N/A N/A
TVP Templeton Developing
Markets Fund ................... X N/A N/A N/A
TVP Templeton International Fund X N/A N/A N/A
TVP Templeton Stock Fund ......... X N/A N/A N/A
TVP Franklin S&P 500 Index Fund X N/A N/A N/A
TVP Franklin Strategic Income
Investments Fund ............... X N/A N/A N/A
VIP Templeton Global Asset
Allocation Fund ................ N/A X X X
VIP Templeton Developing
Markets Equity Fund ............ N/A X X X
VIP Templeton International
Equity Fund .................... N/A X X X
</TABLE>
WHY AM I GIVING VOTING INSTRUCTIONS?
The insurance companies must vote as instructed by owners of registered
variable annuity and variable life insurance contracts whose contracts will be
affected by the reorganization. Plan sponsors and participants may vote only if
specified by the relevant employee benefit plan.
If your contract is allocated to an option investing in the TVP Trust or
the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing
Markets Equity Fund or VIP Templeton International Equity Fund as of November
30, 1999, you will be able to give voting instructions. If you complete and
sign the voting instruction card, the shares related to your contract or
benefit plan will be voted exactly as you instruct. If you simply sign the
voting instruction card without otherwise completing it, these shares will be
voted for the proposals. If you do not return a voting instruction card at all,
these shares will be voted in the same proportion as shares for which the
insurance company has received instructions.
Each fund will vote separately on the relevant proposals and have its own
voting instructions. BECAUSE EACH FUND WILL HAVE ITS OWN VOTING INSTRUCTION
CARD, YOU MAY RECEIVE MORE THAN ONE INSTRUCTION CARD. Included with the
combined proxy
4
<PAGE>
statement/prospectus, are the prospectuses for the VIP Funds. Please note that
the accompanying prospectuses may include VIP Funds and classes that do not
correspond to the TVP Funds that are available under your contract.
WHAT VOTE IS REQUIRED?
A separate vote on proposals 1, 2 and 4 and a separate vote for each
sub-proposal of proposal 3 is required. For each, a "FOR" vote of the holders
of a "1940 Act majority" of the outstanding shares of these funds is necessary.
A 1940 Act majority means the "FOR" vote of the lesser of (1) a majority of the
fund's outstanding shares, or (2) 67% or more of the fund's shares represented
at the meeting if more than 50% of the outstanding shares are represented.
If we do not receive approval of the reorganization of any particular TVP
Fund by its shareholders and for the TVP Templeton Bond Fund by each class of
its shareholders, the reorganization will not be completed for that TVP Fund.
In such case, we will consider what further action is appropriate for that TVP
Fund. If we do not receive approval of the new investment advisory agreement
for any VIP Fund, we will complete the reorganization. The old investment
advisory agreement will continue in effect for the combined funds. If we do not
receive approval of the proposals regarding the fundamental investment
restrictions, the current VIP Fund's fundamental investment restrictions will
continue to apply.
HOW DO THE TVP AND VIP TRUSTEES RECOMMEND I VOTE?
The trustees of the TVP Trust and VIP Trust concluded at meetings in
October that the reorganization should be approved and recommend that you vote
"FOR" all the proposals regarding the various components of the reorganization.
In addition, if any other proposals are properly presented at the meeting
for the TVP Trust and the VIP Trust, the trustees of the TVP Trust and VIP
Trust suggest that you instruct your insurance company to grant the proxy
holders the authority to vote in their discretion. The trustees of the TVP
Trust and the VIP Trust are not currently aware of any other business to be
presented.
CAN I REVOKE MY VOTING INSTRUCTIONS?
You may revoke your voting instruction at any time before the proxy is
voted by:
1. delivering a written revocation to the secretary of the TVP Trust or
VIP Trust;
2. forwarding to the TVP Trust or the VIP Trust a later-dated voting
instruction that is received by the TVP Trust or the VIP Trust at or
prior to its meeting; or
3. attending the TVP Trust or the VIP Trust meeting and giving new voting
instructions in person.
HOW DO THE IMPORTANT FEATURES OF THE FUNDS COMPARE?
The corresponding funds generally have the same investment objectives and
very similar investment policies and strategies. As a result, the corresponding
funds have substantially similar risk factors. In most cases, the portfolio
managers are also the same. Thus, the important features of the TVP Funds
compared to those of the corresponding VIP Funds are nearly identical. We
compare the funds' risk factors, investment objectives and policies, fees and
investment advisers below.
The corresponding funds have slightly different fundamental investment
restrictions. These differences, however, do not materially impact the manner
in which the corresponding funds are managed. We are asking the shareholders of
the VIP Templeton Global Asset Allocation Fund,
5
<PAGE>
Templeton Developing Markets Equity Fund and Templeton International Equity
Fund to approve certain amendments to and elimination of some of these funds'
fundamental investment restrictions. These are described in proposal 3 and
proposal 4 and will make these funds' fundamental investment restrictions more
like those of the corresponding larger TVP Funds. Additional information about
the VIP Funds' current fundamental investment restrictions is contained in the
statement of additional information for the VIP Funds.
HOW DO THE EXPENSES OF THE FUNDS COMPARE?
The expenses of the TVP Funds and VIP Funds are compared in the tables
below, which also set forth the estimated expenses of the combined funds.
Generally, the larger of the corresponding funds has lower total expenses,
except for the TVP Templeton Developing Markets Fund. After the combination,
the combined funds are expected to have lower or the same total annual
operating expenses of the individual funds except that: (1) the combined Asset
Allocation Fund will have slightly higher expenses than the TVP Templeton Asset
Allocation Fund; and (2) the combined Developing Markets Fund will have
moderately higher expenses than the VIP Templeton Developing Markets Equity
Fund.
Each fund has two classes of shares available to insurance companies,
class 1 and class 2. Each class is identical, except that class 2 has a
distribution plan or "rule 12b-1" plan and the class 2 shareholders pay an
additional distribution fee.
The following tables show the actual fees and expenses that you may pay
for buying and holding the class 1 and class 2 shares of the TVP Funds and VIP
Funds, as well as the estimated fees and expenses if the funds are combined.
The estimated fees and expenses are based upon the funds' expenses as of
December 31, 1998.
The combined fund fees and expenses reflect the fees that would apply if
the new investment advisory agreements for the VIP Templeton Global Asset
Allocation Fund, VIP Templeton Developing Markets Equity Fund, VIP Templeton
International Equity Fund and VIP Franklin Small Cap Fund are adopted. If these
investment advisory agreements are adopted, for each of these VIP Funds except
the VIP Templeton Global Asset Allocation Fund, new fund administration
agreements will also be adopted. The fees for these agreements are also
included in the combined fund fees and expenses. The funds do not charge any
shareholder transaction expenses for the class 1 and class 2 shares. THESE
TABLES DO NOT REFLECT THE CHARGES AND FEES ASSESSED BY THE INSURANCE COMPANY
UNDER YOUR CONTRACT.
6
<PAGE>
FEES OF THE CLASS 1 SHARES
-----------------------------------
Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
ADVISORY AND FUND ADMINISTRATION
FEE OTHER EXPENSES
---------------------------------- ----------------------------------
PRO FORMA, PRO FORMA,
TVP FUND VIP FUND COMBINED TVP FUND VIP FUND COMBINED
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Franklin Large Cap Growth Investments Fund(1)
Franklin Large Cap Growth Securities Fund ........... 0.70% 0.75% 0.75% 2.21%(2) 0.02% 0.02%
Franklin Small Cap Investments Fund(1)
Franklin Small Cap Fund ............................. 0.85% 0.75% 0.80%(3) 0.16%(2) 0.02% 0.02%(3)
Mutual Shares Investments Fund(1)
Mutual Shares Securities Fund ....................... 0.70% 0.74% 0.74% 2.17% 0.03% 0.03%
Templeton Asset Allocation Fund
Templeton Global Asset Allocation Fund .............. 0.70% 0.80% 0.73% 0.08% 0.04% 0.06%
Templeton Bond Fund
Templeton Global Income Securities Fund ............. 0.60% 0.57% 0.56% 0.13% 0.06% 0.06%
Templeton Developing Markets Fund
Templeton Developing Markets Equity Fund 1.35% 1.25% 1.39% 0.31% 0.16% 0.17%
Templeton International Fund
Templeton International Equity Fund ................. 0.79% 0.80% 0.75% 0.07% 0.08% 0.08%
Templeton Stock Fund
Templeton Global Growth Fund ........................ 0.80% 0.83% 0.79% 0.09% 0.05% 0.06%
Franklin S&P 500 Index Fund(4)
Franklin S&P 500 Index Fund (New) ................... 0.25% N/A 0.25% 0.28% N/A 0.28%
Franklin Strategic Income Investments Fund(5)
Franklin Strategic Income Securities Fund (New) ..... 0.63% N/A 0.63% 0.32% N/A 0.32%
<CAPTION>
TOTAL ANNUAL FUND
OPERATING EXPENSES
---------------------------------
PRO FORMA,
TVP FUND VIP FUND COMBINED
---------- ---------- -----------
<S> <C> <C> <C>
Franklin Large Cap Growth Investments Fund(1)
Franklin Large Cap Growth Securities Fund ........... 2.91% 0.77% 0.77%
Franklin Small Cap Investments Fund(1)
Franklin Small Cap Fund ............................. 1.01% 0.77% 0.82%(3)
Mutual Shares Investments Fund(1)
Mutual Shares Securities Fund ....................... 2.87% 0.77% 0.77%
Templeton Asset Allocation Fund
Templeton Global Asset Allocation Fund .............. 0.78% 0.84% 0.79%
Templeton Bond Fund
Templeton Global Income Securities Fund ............. 0.73% 0.63% 0.62%
Templeton Developing Markets Fund
Templeton Developing Markets Equity Fund 1.66% 1.41% 1.56%
Templeton International Fund
Templeton International Equity Fund ................. 0.86% 0.88% 0.83%
Templeton Stock Fund
Templeton Global Growth Fund ........................ 0.89% 0.88% 0.85%
Franklin S&P 500 Index Fund(4)
Franklin S&P 500 Index Fund (New) ................... 0.53% N/A 0.53%
Franklin Strategic Income Investments Fund(5)
Franklin Strategic Income Securities Fund (New) ..... 0.95% N/A 0.95%
</TABLE>
- ------------
(1) The investment adviser has agreed in advance to assume certain fund
expenses, and the investment adviser and fund administrator have agreed in
advance to waive or limit their fees as necessary so that total annual fund
operating expenses do not exceed 1.00% for class 1. The investment adviser
and fund administrator are contractually obligated to continue this
arrangement through year 2000.
(2) Other expenses are based on 12/31/99 annualized estimates.
(3) Apart from the reorganization, the shareholders of the VIP Franklin Small
Cap Fund are voting to approve a new investment advisory agreement. If this
advisory agreement is not approved, the management and fund administration
fees, other expenses, and total annual fund operating expenses, for the
combined fund class 1 would be 0.75%, 0.02% and 0.77%, respectively.
(4) The TVP Franklin S&P 500 Index Fund began operations on November 1, 1999.
For purposes of this table, the fees are estimated and based on net assets
of $30 million. The investment adviser has agreed in advance to assume
certain fund expenses, and the investment adviser and fund administrator
have agreed in advance to waive or limit their fees as necessary so that
total annual fund operating expenses do not exceed 0.55% for class 1. The
investment adviser and fund administrator are contractually obligated to
continue this arrangement through year 2000.
(5) The TVP Franklin Strategic Income Securities Fund began operations on July
1, 1999. For purposes of this table, the fees are estimated and based on
net assets of $7.5 million. The investment adviser has agreed in advance to
assume certain fund expenses, and the investment adviser and fund
administrator have agreed in advance to waive or limit their fees as
necessary so that total annual fund operating expenses do not exceed 0.75%
for class 1. The investment adviser and fund administrator are
contractually obligated to continue this arrangement through year 2000.
7
<PAGE>
FEES OF THE CLASS 2 SHARES
-----------------------------------
Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
ADVISORY AND FUND ADMINISTRATION
FEE DISTRIBUTION FEE
---------------------------------- ----------------------------------
TVP VIP PRO FORMA, TVP VIP PRO FORMA,
FUND FUND COMBINED FUND FUND(1) COMBINED
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Franklin Large Cap Growth Investments
Fund(1)
Franklin Large Cap Growth Securities
Fund(2) .................................... N/A 0.75% 0.75% N/A 0.25% 0.25%
Franklin Small Cap Investments Fund(3)
Franklin Small Cap Fund(2) .................. 0.85% 0.75% 0.80%(4) 0.25% 0.25% 0.25%(4)
Mutual Shares Investments Fund(3)
Mutual Shares Securities Fund(2) ............ 0.70% 0.74% 0.74% 0.25% 0.25% 0.25%
Templeton Asset Allocation Fund
Templeton Global Asset Allocation Fund(2) ... 0.70% 0.80% 0.73% 0.25% 0.25% 0.25%
Templeton Bond Fund
Templeton Global Income Securities Fund(2) .. 0.60% 0.57% 0.56% 0.15% 0.25% 0.25%
Templeton Developing Markets Fund
Templeton Developing Markets Equity
Fund(2) .................................... 1.35% 1.25% 1.39% 0.25% 0.25% 0.25%
Templeton International Fund
Templeton International Equity Fund(2) ...... 0.79% 0.80% 0.75% 0.25% 0.25% 0.25%
Templeton Stock Fund
Templeton Global Growth Fund(2) ............. 0.80% 0.83% 0.79% 0.25% 0.25% 0.25%
Franklin S&P 500 Index Fund(6)
Franklin S&P 500 Index Fund (New) ........... 0.25% N/A 0.25% 0.25% N/A 0.25%
Franklin Strategic Income Investments
Fund(7)
Franklin Strategic Income Securities Fund
(New) ...................................... N/A N/A N/A N/A N/A N/A
<CAPTION>
TOTAL ANNUAL FUND
OTHER EXPENSES OPERATING EXPENSE
------------------------------------ ---------------------------------
TVP VIP PRO FORMA, PRO FORMA,
FUND FUND COMBINED TVP FUND VIP FUND COMBINED
------------ ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Franklin Large Cap Growth Investments
Fund(1)
Franklin Large Cap Growth Securities
Fund(2) .................................... N/A 0.02% 0.02% N/A 1.02% 1.02%
Franklin Small Cap Investments Fund(3)
Franklin Small Cap Fund(2) .................. 0.16%(5) 0.02% 0.02%(4) 1.26% 1.02% 1.07%(4)
Mutual Shares Investments Fund(3)
Mutual Shares Securities Fund(2) ............ 2.17% 0.03% 0.03% 3.12% 1.02% 1.02%
Templeton Asset Allocation Fund
Templeton Global Asset Allocation Fund(2) ... 0.08% 0.04% 0.06% 1.03% 1.09% 1.04%
Templeton Bond Fund
Templeton Global Income Securities Fund(2) .. 0.13% 0.06% 0.06% 0.88% 0.88% 0.87%
Templeton Developing Markets Fund
Templeton Developing Markets Equity
Fund(2) .................................... 0.31% 0.16% 0.17% 1.91% 1.66% 1.81%
Templeton International Fund
Templeton International Equity Fund(2) ...... 0.07% 0.08% 0.08% 1.11% 1.13% 1.08%
Templeton Stock Fund
Templeton Global Growth Fund(2) ............. 0.09% 0.05% 0.06% 1.14% 1.13% 1.10%
Franklin S&P 500 Index Fund(6)
Franklin S&P 500 Index Fund (New) ........... 0.28% N/A 0.28% 0.78% N/A 0.78%
Franklin Strategic Income Investments
Fund(7)
Franklin Strategic Income Securities Fund
(New) ...................................... N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) The TVP Franklin Large Cap Growth Investments Fund class 2 has not
commenced operations.
(2) Because no class 2 shares were issued as of December 31, 1998, figures
(other than rule 12b-1 fees) are based on the funds' class 1 actual
expenses for the fiscal year ended December 31, 1998, plus class 2's annual
rule 12b-1 fee of 0.25%. (While the maximum amount payable under each
fund's class 2 rule 12b-1 plan is 0.35% per year of the fund's average
daily net assets, the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust has set the current rate at 0.25% of average daily
net assets per year. From January 6, 1999 to June 30, 1999, these fees were
0.30% of the fund's average daily net assets).
(3) The investment adviser has agreed in advance to assume certain fund
expenses, and the investment adviser and fund administrator have agreed in
advance to waive or limit their fees as necessary so that total annual fund
operating expenses do not exceed 1.25% for class 2. The investment adviser
and fund administrator are contractually obligated to continue this
arrangement through year 2000.
(4) Apart from the reorganization, the shareholders of the VIP Franklin Small
Cap Fund are voting to approve a new investment advisory agreement. If this
advisory agreement is not approved, the management and fund administration
fees, distribution fees, other expenses, and the total annual fund
operating expenses for the combined fund class 2 would be 0.75%, 0.25%,
0.02%, and 1.02%, respectively.
(5) Other expenses are based on 12/31/99 annualized estimates.
(6) The TVP Franklin S&P 500 Index Fund began operations on November 1, 1999.
For purposes of this table, the fees are estimated and based on net asset
of $30 million. The investment adviser has agreed in advance to assume
certain fund expenses, and the investment adviser and fund administrator
have agreed in advance to waive or limit their fees as necessary so that
total fund operating expenses do not exceed 0.80% for class 2. The
investment adviser and fund administrator are contractually obligated to
continue this arrangement through year 2000.
(7) The TVP Franklin Strategic Income Investments Fund class 2 has not
commenced operations.
8
<PAGE>
THE TVP FUNDS AND VIP FUNDS COMPARATIVE FEE TABLE EXAMPLES
The following examples are intended to help you compare the cost of
investing in each fund and in the combined funds. These examples assume you
invest $10,000 for the periods shown and then sell your shares at the end of
those periods. These examples also assume your investment has a 5% return each
year and the fund's operating expenses are BEFORE WAIVER, if applicable, and
remain the same. THESE EXAMPLES DO NOT INCLUDE ANY FEES OR SALES CHARGES
IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUNDS ARE INVESTMENT
OPTIONS. If they had been included, your costs would be higher. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
TVP FRANKLIN LARGE CAP GROWTH INVESTMENTS FUND
VIP FRANKLIN LARGE CAP GROWTH SECURITIES FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP FRANKLIN LARGE CAP GROWTH INVESTMENTS FUND
Class 1 Shares ............................... $294 $901 $1,533 $3,233
Class 2 Shares ............................... N/A N/A N/A N/A
VIP FRANKLIN LARGE CAP GROWTH SECURITIES FUND
Class 1 Shares ............................... $ 79 $246 $ 428 $ 954
Class 2 Shares ............................... $109 $340 $ 590 $1,221
COMBINED FUND PRO FORMA
Class 1 Shares ............................... $ 79 $246 $ 428 $ 954
Class 2 Shares ............................... $109 $340 $ 590 $1,221
</TABLE>
TVP FRANKLIN SMALL CAP INVESTMENTS FUND
VIP FRANKLIN SMALL CAP FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP FRANKLIN SMALL CAP INVESTMENTS FUND
Class 1 Shares ........................ $103 $323 $560 $1,240
Class 2 Shares ........................ $129 $401 $694 $1,527
VIP FRANKLIN SMALL CAP FUND
Class 1 Shares ........................ $ 79 $246 $428 $ 954
Class 2 Shares ........................ $104 $325 $563 $1,248
COMBINED FUND PRO FORMA
Class 1 Shares ........................ $ 84 $262 $455 $1,014
Class 2 Shares ........................ $109 $340 $590 $1,306
</TABLE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP MUTUAL SHARES INVESTMENTS FUND
Class 1 Shares ................... $290 $889 $1,513 $3,195
Class 2 Shares ................... $315 $963 $1,635 $3,430
VIP MUTUAL SHARES SECURITIES FUND
Class 1 Shares ................... $ 79 $246 $ 428 $ 954
Class 2 Shares ................... $109 $340 $ 590 $1,221
COMBINED FUND PRO FORMA
Class 1 Shares ................... $ 79 $246 $ 428 $ 954
Class 2 Shares ................... $104 $325 $ 563 $1,248
</TABLE>
9
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP TEMPLETON ASSET ALLOCATION FUND
Class 1 Shares ........................... $ 80 $249 $433 $ 966
Class 2 Shares ........................... $105 $328 $569 $1,259
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
Class 1 Shares ........................... $ 86 $268 $466 $1,037
Class 2 Shares ........................... $116 $362 $628 $1,302
COMBINED FUND PRO FORMA
Class 1 Shares ........................... $ 81 $252 $439 $ 978
Class 2 Shares ........................... $106 $331 $574 $1,271
</TABLE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP TEMPLETON BOND FUND
Class 1 Shares ............................ $75 $233 $406 $ 906
Class 2 Shares ............................ $90 $281 $488 $1,084
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
Class 1 Shares ............................ $64 $202 $351 $ 786
Class 2 Shares ............................ $95 $296 $515 $1,058
COMBINED FUND PRO FORMA
Class 1 Shares ............................ $63 $199 $346 $ 774
Class 2 Shares ............................ $89 $278 $482 $1,073
</TABLE>
TVP TEMPLETON DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP TEMPLETON DEVELOPING MARKETS FUND
Class 1 Shares ............................. $169 $523 $ 902 $1,965
Class 2 Shares ............................. $194 $600 $1,032 $2,233
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
Class 1 Shares ............................. $144 $446 $ 771 $1,691
Class 2 Shares ............................. $174 $539 $ 928 $1,940
COMBINED FUND PRO FORMA
Class 1 Shares ............................. $159 $493 $ 850 $1,856
Class 2 Shares ............................. $184 $569 $ 980 $2,127
</TABLE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP TEMPLETON INTERNATIONAL FUND
Class 1 Shares ........................ $ 88 $274 $477 $1,061
Class 2 Shares ........................ $113 $353 $612 $1,352
VIP TEMPLETON INTERNATIONAL EQUITY FUND
Class 1 Shares ........................ $ 90 $281 $488 $1,084
Class 2 Shares ........................ $120 $375 $649 $1,348
COMBINED FUND PRO FORMA
Class 1 Shares ........................ $ 85 $265 $460 $1,025
Class 2 Shares ........................ $110 $343 $595 $1,317
</TABLE>
10
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
TVP TEMPLETON STOCK FUND
Class 1 Shares ................. $ 91 $284 $493 $1,096
Class 2 Shares ................. $116 $362 $628 $1,386
VIP TEMPLETON GLOBAL GROWTH FUND
Class 1 Shares ................. $ 90 $281 $488 $1,084
Class 2 Shares ................. $120 $375 $649 $1,348
COMBINED FUND PRO FORMA
Class 1 Shares ................. $ 87 $271 $471 $1,049
Class 2 Shares ................. $112 $350 $606 $1,340
</TABLE>
TVP FRANKLIN S&P 500 INDEX FUND
VIP FRANKLIN S&P 500 INDEX FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
--------- --------
<S> <C> <C>
TVP FRANKLIN S&P 500 INDEX FUND
Class 1 Shares ................ $ 54 $170
Class 2 Shares ................ $ 80 $249
VIP FRANKLIN S&P 500 INDEX FUND
Class 1 Shares ................ N/A N/A
Class 2 Shares ................ N/A N/A
COMBINED FUND PRO FORMA
Class 1 Shares ................ $ 54 $170
Class 2 Shares ................ $ 80 $249
</TABLE>
TVP FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
VIP FRANKLIN STRATEGIC INCOME SECURITIES FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEAR
--------- -------
<S> <C> <C>
TVP FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
Class 1 Shares ............................... $ 97 $303
Class 2 Shares ............................... $122 $381
VIP FRANKLIN STRATEGIC INCOME SECURITIES FUND
Class 1 Shares ............................... N/A N/A
Class 2 Shares ............................... N/A N/A
COMBINED FUND PRO FORMA
Class 1 Shares ............................... $ 97 $303
Class 2 Shares ............................... $122 $381
</TABLE>
In addition, the TVP Franklin S&P 500 Index Fund has a third class of
shares available to employee benefit plans. Class 3 is identical to class 1 and
class 2, except that class 2 and class 3 have their own distribution plans or
"rule 12b-1" plans. Also, class 3 bears its own registration expenses under
state and federal securities laws and transfer agency (shareholder account
maintenance) expenses. The following table shows the actual fees and expenses
that you may pay for buying and holding the class 3 shares of the TVP Franklin
S&P 500 Index Fund. THIS TABLE DOES NOT REFLECT ANY CHARGES AND FEES ASSESSED
UNDER YOUR EMPLOYEE BENEFIT PLAN. The fees and expenses will be the same after
the reorganization because the VIP Franklin S&P 500 Index Fund will have the
same agreements as the TVP Fund.
11
<PAGE>
FRANKLIN S&P 500 INDEX FUND
CLASS 3
<TABLE>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) as a percentage of offering price
Load imposed on purchases ................................... 0.00%
Maximum deferred sales charge (load) ........................ 0.00%(1)
Annual Fund Operating Expenses
Management fees ............................................. 0.15%
Distribution and service (12b-1) fees ....................... 0.25%
Other expenses .............................................. 0.60%
Total annual fund operating expenses .......................... 1.00%
Fee waiver/expense reductions ................................. (0.20%)(2)
Net expenses .................................................. 0.80%
</TABLE>
- ----------------
1. Shares acquired through an exchange from another Franklin Templeton fund may
be subject to a contingent deferred sales charge in certain circumstances.
Please see the prospectus for class 3 shares of the Franklin S&P 500 Index
Fund.
2. The investment adviser has agreed in advance to assume certain fund
expenses, and the investment adviser and fund administrator have agreed in
advance to waive or limit their fees as necessary so that the total annual
fund operating expenses do not exceed 0.80% for class 3. The investment
adviser and the fund administrator are contractually obligated to continue
this arrangement through year 2000.
COMPARATIVE FEE TABLE EXAMPLE
The following example is intended to help you compare the cost of investing in
class 3 of the fund. This example assumes you invest $10,000 for the periods
shown and then sell your shares at the end of those periods. This example also
assumes your investment had a 5% return each year and the fund's operating
expenses are BEFORE WAIVER, and remain the same. THE TABLE AND THE EXAMPLE DO
NOT INCLUDE ANY PLAN ADMINISTRATION FEES AND EXPENSES IMPOSED ON RETIREMENT
PLANS FOR WHICH THE FUND'S CLASS 3 SHARES ARE AN INVESTMENT OPTION. If they
were included, your costs would be higher. Although your actual costs may be
higher or lower based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
---------- --------
<S> <C> <C>
TVP Franklin S&P 500 Index Fund -- Class 3 .......... $ 82 $255
VIP Franklin S&P 500 Index Fund -- Class 3 .......... N/A N/A
Combined Fund Pro Forma -- Class 3 .................. $ 82 $255
</TABLE>
12
<PAGE>
HOW DOES THE PERFORMANCE OF THE FUNDS COMPARE?
Due to the substantial similarities in investment objectives and policies,
over time the corresponding funds could be expected to perform similarly,
though not identically. Differences in performance between corresponding funds
are generally due to differences in asset size and cash flow. The performance
of the larger corresponding fund is generally better. The performance of the
funds as of September 30, 1999 is set forth below:
CLASS 1 COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS CUMULATIVE TOTAL RETURNS
----------------------------------- ----------------------------------------------
5-YEARS 10-YEARS INCEPTION 1-YEAR 5-YEARS 10-YEARS INCEPTION
TO TO TO TO TO TO TO
INCEPTION SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
FUNDS DATE 1999 1999 1999 1999 1999 1999 1999
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TVP Franklin Large Cap Growth
Investments Fund* ............... May-01-98 N/A N/A 21.98 37.81 N/A N/A 32.57
VIP Franklin Large Cap Growth
Investments Fund** .............. May-01-96 N/A N/A 17.44 28.32 N/A N/A 73.26
TVP Franklin Small Cap
Investments Fund ................ May-01-98 N/A N/A 10.65 51.70 N/A N/A 15.45
VIP Franklin Small Cap
Investments Fund ................ Nov-01-95 N/A N/A 17.45 52.16 N/A N/A 87.81
TVP Mutual Shares Investments
Fund ............................ May-01-98 N/A N/A 0.47 16.92 N/A N/A 0.66
VIP Mutual Shares Securities
Fund ............................ Nov-08-96 N/A N/A 8.84 18.30 N/A N/A 27.75
TVP Templeton Asset
Allocation Fund ................. Aug-24-88 13.91 12.15 12.15 31.49 91.78 214.65 257.18
VIP Templeton Global Asset
Allocation Fund ................. May-01-95 N/A N/A 8.58 12.55 N/A N/A 43.85
TVP Templeton Bond Fund .......... Aug-24-88 5.62 6.31 6.34 -1.94 31.46 84.31 97.86
VIP Templeton Global Income
Securities Fund ................. Jan-21-89 5.52 6.19 6.37 -1.99 30.81 82.39 93.33
TVP Templeton Developing
Markets Fund .................... Mar-04-96 N/A N/A -11.60 54.49 N/A N/A -35.64
VIP Templeton Developing
Markets Equity Fund ............. Mar-15-94 -0.19 N/A 0.75 47.02 -0.94 N/A 4.21
TVP Templeton International
Fund ............................ May-01-92 13.30 N/A 13.95 24.62 86.69 N/A 163.33
VIP Templeton International
Equity Fund ..................... Jan-27-92 10.77 N/A 10.88 21.93 66.73 N/A 120.90
TVP Templeton Stock Fund ......... Aug-24-88 12.79 11.76 12.18 27.47 82.53 203.99 258.17
VIP Templeton Global Growth
Fund ............................ Mar-15-94 12.49 N/A 12.15 25.91 80.15 N/A 88.83
</TABLE>
*PREVIOUSLY NAMED THE FRANKLIN GROWTH INVESTMENTS FUND
**PREVIOUSLY NAMED THE FRANKLIN CAPITAL GROWTH FUND
The managers of the TVP Franklin Large Cap Growth Investments, Franklin Small
Cap Investments, and Mutual Shares Investments Funds, are contractually
obligated to limit class 1 expenses for these funds to 1.00% of total net
assets through 2000.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
Total return figures are based on the inception of each TVP and VIP Fund, which
may have started before the contract. Total return represents the cumulative or
average annual change in value, assuming reinvestment of dividends and capital
gains. Average returns smooth out variations in returns, which can be
significant; they are not the same as year by year results.
13
<PAGE>
CLASS 2 COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS CUMULATIVE TOTAL RETURNS
----------------------------------- ----------------------------------------------
5-YEARS 10-YEARS INCEPTION 1-YEAR 5-YEARS 10-YEARS INCEPTION
TO TO TO TO TO TO TO
INCEPTION SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
FUNDS DATE 1999 1999 1999 1999 1999 1999 1999
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TVP Franklin Large Cap Growth
Investments Fund* ............... May-01-98 N/A N/A N/A N/A N/A N/A N/A
VIP Franklin Large Cap Growth
Investments Fund** .............. May-01-96 N/A N/A 17.34 27.94 N/A N/A 72.76
TVP Franklin Small Cap
Investments Fund ................ May-01-98 N/A N/A 10.43 51.27 N/A N/A 15.12
VIP Franklin Small Cap
Investments Fund ................ Nov-01-95 N/A N/A 17.38 52.16 N/A N/A 87.36
TVP Mutual Shares Investments
Fund ............................ May-01-98 N/A N/A 0.31 16.66 N/A N/A 0.45
VIP Mutual Shares Securities
Fund ............................ Nov-08-96 N/A N/A 8.93 18.59 N/A N/A 28.07
TVP Templeton Asset
Allocation Fund ................. Aug-24-88 13.78 12.08 12.09 31.16 90.65 212.80 255.08
VIP Templeton Global Asset
Allocation Fund ................. May-01-95 N/A N/A 8.56 12.38 N/A N/A 43.77
TVP Templeton Bond Fund .......... Aug-24-88 5.60 6.30 6.33 -2.03 31.32 84.13 97.66
VIP Templeton Global Income
Securities Fund ................. Jan-24-89 5.47 6.26 6.43 -2.23 30.50 83.61 94.63
TVP Templeton Developing
Markets Fund .................... Mar-04-96 N/A N/A -11.72 54.09 N/A N/A -36.01
VIP Templeton Developing
Markets Equity Fund ............. Mar-15-94 -0.24 N/A 0.70 46.72 -1.17 N/A 3.96
TVP Templeton International
Fund ............................ May-01-92 13.20 N/A 13.90 24.30 85.50 N/A 161.60
VIP Templeton International
Equity Fund ..................... Jan-27-92 10.69 N/A 10.83 21.49 66.18 N/A 120.17
TVP Templeton Stock Fund ......... Aug-24-88 12.64 11.69 12.12 27.14 81.34 202.01 255.84
VIP Templeton Global Growth
Fund ............................ Mar-15-94 12.47 N/A 12.12 25.76 79.94 N/A 88.83
</TABLE>
*PREVIOUSLY NAMED THE FRANKLIN GROWTH INVESTMENTS FUND
**PREVIOUSLY NAMED THE FRANKLIN CAPITAL GROWTH FUND
Standardized performance for class 2 shares reflects a blended figure,
combining: (a) for periods prior to class 2's inception on 5/1/97 for the TVP
Funds and 1/6/99 for the VIP Funds, historical results of class 1 shares, and
(b) for periods after 5/1/97 for the TVP Funds and 1/6/99 for the VIP Funds,
class 2's results reflecting an additional 12b-1 fee expense, which also
affects all future performance. The managers of the TVP Franklin Large Cap
Growth Investments, Franklin Small Cap Investments, and Mutual Share
Investments Funds, are contractually obligated to limit class 2 expenses for
these funds to 1.25% of total net assets through 2000.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
Total return figures are based on the inception of each TVP and VIP Fund, which
may have started before the contract. Total return represents the cumulative or
average annual change in value, assuming reinvestment of dividends and capital
gains. Average returns smooth out variations in returns, which can be
significant; they are not the same as year by year results.
14
<PAGE>
HOW WILL THE REORGANIZATION AFFECT ME?
We anticipate that the reorganization and the increase in net assets for
the combined funds will result in operating efficiencies that will benefit you
as well as the shareholders. We also believe that the reorganization has the
following additional benefits:
o COST SAVINGS. The combined funds have a potential to decrease
their operating expenses by spreading fixed costs over a larger pool of
assets and by efficiencies in portfolio management.
o PORTFOLIO MANAGEMENT. For the newer and smaller funds, an increase
in net assets may also afford greater flexibility and diversification in
pursuing their investment objectives.
o MORE FUNDS. The VIP Trust offers eighteen more funds than the TVP
Trust. Your insurance company may choose to make these additional VIP
Funds available under your contract.
The reorganization will not affect your contract rights. You will not
experience any change in the value of your contract immediately following the
reorganization.
WHAT HAPPENS AFTER THE REORGANIZATION IF MY INSURANCE COMPANY CURRENTLY INVESTS
IN A TVP FUND?
The only change will be the funds in which your insurance company invests.
Your insurance company will keep the same separate account. Your contract value
will be allocated to the same separate account and that separate account will
invest in the corresponding VIP Fund after the reorganization. Thus, after the
reorganization your contract value will depend on the performance of the
corresponding VIP Funds as combined with the TVP Funds rather than those of the
current TVP Funds.
WHAT HAPPENS AFTER THE REORGANIZATION IF MY INSURANCE COMPANY CURRENTLY INVESTS
IN A VIP FUND?
After the reorganization, the VIP Funds will acquire the assets and
liabilities of the TVP Funds. No shares of the VIP Trust are being exchanged.
If approved by shareholders, the VIP Templeton Global Asset Allocation Fund,
the VIP Templeton International Equity Fund and VIP Templeton Developing
Markets Equity Fund will adopt new investment advisory agreements. These will
be nearly the same as those currently in effect for the corresponding TVP
Funds, except that for the VIP Templeton International Equity Fund, Templeton
Global Advisors Limited will serve as the investment adviser. In addition, if
approved by shareholders, these VIP Funds will adopt changes to their
fundamental investment restrictions which will make them more like the larger
corresponding TVP Funds. Apart from the reorganization, the shareholders of the
VIP Franklin Small Cap Fund are being asked to approve a new investment
advisory agreement in a separate proxy statement.
WILL DIVIDENDS BE CHANGED?
No. The TVP Funds and VIP Funds declare and pay dividends and
distributions at the same intervals. These dividends and distributions will
continue to be reinvested by your insurance company in additional shares of the
VIP Funds.
HOW ARE SHARES BOUGHT OR SOLD?
Shares of the TVP Trust and the VIP Trust are only sold to insurance
companies and, in some cases, to employee benefit plans that are qualified
plans under the federal tax law. The VIP Trust will continue to sell its shares
on a continuous basis at net asset value only to insurance companies and these
qualified plans. The reorganization will have no impact on your right to
reallocate among your insurance company's separate account options, as
permitted under your contract.
WHAT ARE THE TAX CONSEQUENCES?
In the opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP,
special counsel to the TVP Trust and the VIP Trust, based on certain
assumptions and representations, it is not expected that shareholders will
recognize any gain or loss for federal income tax purposes as a result of the
exchange of their TVP Trust shares for the VIP Trust shares or that the VIP
Funds will recognize any gain or loss upon receipt of the corresponding TVP
Funds' assets.
15
<PAGE>
PROPOSAL 1: COMBINATION OF THE TVP FUNDS WITH THE VIP FUNDS
COMPARISON OF THE RISK FACTORS
Investing in the TVP Funds and VIP Funds involves risks. These risks
relate to the underlying investments of the TVP Funds and VIP Funds. These
risks may cause the value of shares of a fund to increase or decrease based on
movements in the value of these underlying investments.
ARE THE RISK FACTORS FOR THE CORRESPONDING TVP AND VIP FUNDS SUBSTANTIALLY THE
SAME?
Yes. The risk factors are substantially the same due to the substantial
similarities of the investment objectives and policies between the
corresponding TVP and VIP Funds. The risks of each VIP Fund are described in
greater detail in the accompanying VIP Fund prospectuses included as Exhibit
. The risks for VIP Franklin S&P 500 Index Fund and the VIP Franklin
Strategic Income Securities Fund will be the same as those of the corresponding
TVP Funds because the VIP Trust will adopt all features of the corresponding
TVP Funds.
16
<PAGE>
WHAT ARE THE PRINCIPAL RISK FACTORS?
We have identified the principal risk factors of each TVP Fund and each
corresponding VIP Fund in the table below. We describe each of these risks
after the table.
<TABLE>
<CAPTION>
DERIVATIVE FOREIGN ILLIQUID INDEX
FUND CREDIT SECURITIES DIVERSIFICATION SECURITIES SECURITIES TRACKING
- --------------------------------- -------- ------------ ----------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
TVP Franklin Large Cap
Growth Investments Fund ........
VIP Franklin Large Cap
Growth Securities Fund .........
TVP Franklin Small Cap
Investments Fund ...............
VIP Franklin Small Cap
Fund ...........................
TVP Mutual Shares
Investments Fund ............... X X X X
VIP Mutual Shares Securities
Fund ........................... X X X X
TVP Templeton Asset
Allocation Fund ................ X X X
VIP Templeton Global Asset
Allocation Fund ................ X X X
TVP Templeton Bond Fund ......... X X X X
VIP Templeton Global Income
Securities Fund ................ X X X X
TVP Templeton Developing
Markets Fund ................... X X
VIP Templeton Developing
Markets Equity Fund ............ X X
TVP Templeton International
Fund ........................... X X
VIP Templeton International
Equity Fund .................... X X
TVP Templeton Stock Fund ........ X X
VIP Templeton Global
Growth Fund .................... X X
TVP Franklin S&P 500
Index Fund ..................... X X X
VIP Franklin S&P 500
Index Fund ..................... X X X
TVP Franklin Strategic Income
Investments Fund ............... X X X X
VIP Franklin Strategic Income
Securities Fund ................ X X X X
<CAPTION>
MORTGAGE
SECURITIES REORGANIZING
LOWER- AND ASSET OR
INTEREST RATED BACKED DISTRESSED SMALLER
FUND RATE SECURITIES SECURITIES COMPANIES SECTOR(S) COMPANIES STOCKS
- --------------------------------- ---------- ------------ ------------ ------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TVP Franklin Large Cap
Growth Investments Fund ........ X X
VIP Franklin Large Cap
Growth Securities Fund ......... X X
TVP Franklin Small Cap
Investments Fund ............... X X
VIP Franklin Small Cap
Fund ........................... X X
TVP Mutual Shares
Investments Fund ............... X X X
VIP Mutual Shares Securities
Fund ........................... X X X
TVP Templeton Asset
Allocation Fund ................ X X X
VIP Templeton Global Asset
Allocation Fund ................ X X X
TVP Templeton Bond Fund ......... X X
VIP Templeton Global Income
Securities Fund ................ X X
TVP Templeton Developing
Markets Fund ................... X X
VIP Templeton Developing
Markets Equity Fund ............ X X
TVP Templeton International
Fund ........................... X X
VIP Templeton International
Equity Fund .................... X X
TVP Templeton Stock Fund ........ X X
VIP Templeton Global
Growth Fund .................... X X
TVP Franklin S&P 500
Index Fund ..................... X X
VIP Franklin S&P 500
Index Fund ..................... X X
TVP Franklin Strategic Income
Investments Fund ............... X X X
VIP Franklin Strategic Income
Securities Fund ................ X X X
</TABLE>
17
<PAGE>
We have described each of the principal risk factors identified above for
the TVP and VIP Funds below. Most of the risks apply to more than one fund.
Please refer to the above table to see if the risk applies to a particular
fund.
CREDIT. This 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 the security's value and, thus, impact the value of fund shares.
INDEBTEDNESS AND PARTICIPATIONS. The purchase of debt securities of
reorganizing or distressed companies always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may
be lost. There are no established markets for indebtedness, making them
less liquid than other securities, and purchasers of participations, such
as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. In addition, the fund takes on the risk as to the
creditworthiness of the bank or other financial intermediary issuer, as
well as of the issuer of the underlying indebtedness.
LOWER-RATED SECURITIES. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Companies
issuing high yield debt securities are not as strong financially, and are
more likely to encounter financial difficulties and be more vulnerable to
changes in the economy, such as a recession or a sustained period of rising
interest rates. If an issuer stops paying interest and/or principal,
payments may never resume. The fund may lose its entire investment in bonds
that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher
quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities generally are less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it
may be difficult to sell these securities promptly at an acceptable price,
which may limit the fund's ability to sell these securities.
DERIVATIVE SECURITIES. Derivative investments, such as forward currency
exchange contracts, stock index futures and stock index options are financial
instruments whose performance depends, at least in part, on the performance of
an underlying asset such as stock price indices, or currency exchange rates.
They are used to help manage interest rate and currency risks, increase
liquidity, or invest in a particular stock, bond or index in a more efficient
way. Their successful use will depend on the manager's ability to predict
market movements. Losses from their use can be greater than if they had not
been used. Risks include potential loss to the fund due to the derivative
securities failure to correlate well with the indices or securities for which
they are acting as a substitute, the imposition of controls by a government on
the exchange of foreign currencies, delivery failure, default by the other
party or inability to close out a position because the trading market becomes
illiquid.
DIVERSIFICATION. If a fund is non-diversified under the federal securities
laws it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
FOREIGN SECURITIES. Securities of companies and governments located
outside the U.S., including Depositary Receipts, involve risks that can
increase the potential for losses in the fund.
CURRENCY. Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a
foreign currency, an investment in that country loses value because the
investment is worth fewer dollars. Currency markets generally are not as
regulated as securities markets.
18
<PAGE>
COUNTRY. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and
more volatile than those in the U.S. The risks of investing in these
countries include the possibility of currency devaluations, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes that U.S. markets, resulting in less liquidity and
more volatility than experienced in the U.S. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not
unusual.
COMPANY. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as
U.S. companies and their securities may not be as liquid as securities of
similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers,
and companies generally have less government supervision and regulation
than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to non-U.S. investments in non-U.S. courts than with
respect to U.S. companies in U.S. courts.
ILLIQUID SECURITIES. Illiquid securities are securities with a limited
trading market. There is a possible risk that the securities cannot be readily
sold or can only be resold at a price significantly lower than their value.
INDEX TRACKING. The S&P 500 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.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes. A sub-category of
interest rate risk is REINVESTMENT RISK, which is the risk that interest rates
will be lower when the fund seeks to reinvest interest payments, or the
proceeds from a matured debt security, resulting in less income received by the
fund.
MORTGAGE SECURITIES AND ASSET BACKED SECURITIES. Ginnie Maes, and other
mortgage- and asset-backed securities, differ from conventional debt securities
because principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal due to
voluntary prepayments, refinancing or foreclosure on the underlying mortgage or
other loans. During periods of declining interest rates, principal prepayments
generally increase. The fund may be forced to reinvest returned principal at
lower interest rates, and there may be less potential for capital appreciation.
In periods of rising interest rates, prepayments can decline, thus extending
the security's maturity which may in turn cause the security's price to fall.
Credit enhancements, if any, may be inadequate in the event of default.
19
<PAGE>
REORGANIZING OR DISTRESSED COMPANIES. The Mutual Shares Securities Fund's
bargain-driven focus may result in the fund choosing securities that are not
widely followed by other investors, including companies reporting poor
earnings, companies whose share prices have declined sharply, turnarounds,
cyclical companies, or companies emerging from bankruptcy, which may have
higher risk. There can be no assurance that any merger or other restructuring,
or tender or exchange offer proposed at the time the fund invests in a
reorganizing or distressed company will be completed on the terms contemplated,
and therefore, benefit the fund.
SECTOR(S). By having significant positions in a limited number of
industries (but not in excess of 25% of total assets in a given sector), the
fund carries much greater risk of adverse developments in those industries,
than a fund that invests in a wide variety of industries.
SMALLER COMPANIES. While smaller companies, and to a lesser extent
mid-size companies, may offer greater opportunities for capital growth than
larger, more established companies, they also have more risk. Historically,
smaller company securities have been more volatile in price and have fluctuated
independently from larger company securities, especially over the shorter-term.
Smaller or relatively new companies can be particularly sensitive to changing
economic conditions, their growth prospects are less certain, their securities
are less liquid, and they can be considered speculative. These companies may
suffer significant losses, and technology and biotechnology industry stocks, in
particular, can be subject to abrupt or erratic price movements.
STOCKS. While this may not be the case in foreign markets, in the U.S.,
stocks historically have outperformed other asset classes over the long term
(over the short term, they tend to go up and down more dramatically). These
price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered cheap relative to the company's perceived value and are often out of
favor with other investors. If other investors fail to recognize the company's
value and do not become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
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.
20
<PAGE>
COMPARISON OF THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
To help you understand the impact of the reorganization, we have compared
the important features of the funds.
ARE THE INVESTMENT OBJECTIVES AND POLICIES FOR THE CORRESPONDING TVP AND VIP
FUNDS SUBSTANTIALLY THE SAME?
The investment objectives and policies of all pairs of corresponding funds
are substantially similar. In each case, the VIP Fund invests primarily in the
same types of securities as the corresponding TVP Fund because of the
similarities in their investment policies and strategies. However, there are
some differences. These occur with the (1) TVP Templeton Asset Allocation Fund
and the VIP Templeton Global Asset Allocation Fund, (2) TVP Templeton Bond Fund
and VIP Templeton Global Income Securities Fund, and (3) TVP Templeton
International Fund and VIP Templeton International Equity Fund.
The TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset
Allocation Fund have two differences in their stated policies. First, the VIP
Fund may invest up to 25% of its assets in higher yielding, medium and
lower-rated debt securities, while the TVP Fund may only invest 15% of its
assets in these securities. Second, the VIP Fund is restricted from investing
in securities where the issuer has failed to make a payment that is due.
The TVP Templeton Bond Fund and the VIP Templeton Global Income Securities
Fund also have two differences in their stated policies. First, the VIP Fund
may only invest up to 30% of its assets in higher yielding, medium and
lower-rated debt securities, while the TVP Fund's investment in these
securities is not limited. Second, the VIP Fund is restricted from investing in
securities where the issuer has failed to make a payment that is due.
The TVP Templeton International Fund and the VIP Templeton International
Equity Fund have one difference in their stated policies. The VIP Fund invests
primarily in equity securities that trade in non-U.S. markets, including
emerging markets, and that are issued by companies that have their principal
activities outside the U.S., while the TVP Fund invests primarily in equity
securities of companies located outside the U.S., including emerging markets.
Each of the corresponding TVP and VIP Funds has adopted slightly different
fundamental investment restrictions. These differences, however, do not
materially impact the manner in which the corresponding funds are managed. We
are asking the shareholders of the VIP Templeton Global Asset Allocation Fund,
VIP Templeton Developing Markets Equity Fund and VIP Templeton International
Equity Fund to approve certain changes to and eliminations of some of these
funds' fundamental investment restrictions. These changes are described in
proposal 3 and proposal 4. These changes will make these funds' fundamental
investment restrictions more like those of the corresponding TVP Funds.
Additional information about the VIP Funds' current fundamental investment
restrictions is contained in the statement of additional information for the
VIP Funds.
We believe that these differences in stated policies and fundamental
restrictions are minor and/or are of no practical significance as the portfolio
managers invest for the pairs of corresponding funds in a similar manner.
21
<PAGE>
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES?
<TABLE>
<S> <C>
VIP FRANKLIN LARGE CAP TVP FRANKLIN LARGE CAP
GROWTH SECURITIES FUND GROWTH INVESTMENTS FUND
- -------------------------------------------------- ----------------------------------------
OBJECTIVE-Capital appreciation.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its assets in equity securities of U.S. large cap
growth companies ($8.5 billion or more),
focusing on those companies that are expected
to have revenue growth in excess of the
economy as a whole either through above-
average industry expansion or market share
gains.
VIP FRANKLIN SMALL CAP FUND TVP FRANKLIN SMALL CAP INVESTMENTS FUND
- -------------------------------------------------- ----------------------------------------
OBJECTIVE-Long-term capital growth.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its assets in equity securities of U.S. small
capitalization growth companies.
VIP MUTUAL SHARES SECURITIES FUND TVP MUTUAL SHARES INVESTMENTS FUND
- -------------------------------------------------- ----------------------------------------
OBJECTIVE-Capital appreciation. Secondarily it
seeks income.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its assets in equity securities of companies
which the manager believes are available at a
market price less than their actual value based
on certain recognized or objective criteria
(intrinsic value).
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND TVP TEMPLETON ASSET ALLOCATION FUND
- -------------------------------------------------- ----------------------------------------
OBJECTIVE-High total return.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest in equity
securities of companies in any nation, debt
securities of companies and governments of
any nation, and in money market instruments.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND TVP TEMPLETON BOND FUND
- -------------------------------------------------- -------------------------------------------------
OBJECTIVE-High current income. Capital
appreciation is a secondary consideration.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its assets in debt securities of governments and
their political subdivisions and agencies,
supranational organizations and companies
located anywhere in the world, including
emerging markets.
VIP TEMPLETON DEVELOPING
MARKETS EQUITY FUND TVP TEMPLETON DEVELOPING MARKETS FUND
- -------------------------------------------------- -------------------------------------------------
OBJECTIVE-Long-term capital appreciation.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its total assets in emerging market equity
securities.
VIP TEMPLETON INTERNATIONAL EQUITY FUND TVP TEMPLETON INTERNATIONAL FUND
- -------------------------------------------------- -------------------------------------------------
OBJECTIVE-Long-term capital growth. OBJECTIVE-Long-term capital growth.
PRINCIPAL POLICIES-Under normal market PRINCIPAL POLICIES-Under normal market
conditions, the fund will invest at least 65% of conditions, the fund will invest at least 65% of
its assets in equity securities that trade in its assets in equity securities of companies
non-U.S. markets, including emerging markets, located outside the U.S., including emerging
and that are issued by companies that have markets.
their principal activities outside the U.S.
VIP TEMPLETON GLOBAL GROWTH FUND TVP TEMPLETON STOCK FUND
- -------------------------------------------------- -------------------------------------------------
OBJECTIVE-Long-term capital growth.
PRINCIPAL POLICIES-Under normal market Same
conditions, the fund will invest at least 65% of
its assets in equity securities of companies
throughout the world, including the U.S. and
emerging markets.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
VIP FRANKLIN S&P 500 INDEX FUND TVP FRANKLIN S&P 500 INDEX FUND
- ------------------------------------------------ -------------------------------------------------
This is a new fund. The investment objectives OBJECTIVE-To match the performance of the
and principal policies will be the same as the Standard & Poor's 500 Composite Stock Price
TVP Franklin S&P Index Fund. Index (S&P 500 Index) before the deduction
of expenses.
PRINCIPAL POLICIES-Under normal market
conditions, the fund uses an investment
"indexing" strategy designed to track the
performance of the S&P 500 Index.
TVP FRANKLIN STRATEGIC
VIP FRANKLIN STRATEGIC INCOME SECURITIES FUND INCOME INVESTMENTS FUND
- ------------------------------------------------ -------------------------------------------------
This is a new fund. The investment objectives OBJECTIVE-To earn a high level of current
and principal policies will be the same as the income. Its secondary goal is long-term capital
TVP Franklin Strategic Income Investments appreciation.
Fund.
PRINCIPAL POLICIES-Under normal market
conditions, the fund will invest at least 65% of
its total assets in U.S. and non-U.S. debt
securities.
</TABLE>
COMPARISON OF THE MANAGEMENT OF THE FUNDS
IS THE MANAGEMENT OF THE CORRESPONDING FUNDS THE SAME?
Almost. The investment adviser responsible for the day-to-day management
of the corresponding funds is the same, except for the TVP Templeton Stock Fund
and the VIP Templeton Global Growth Fund.
The investment adviser to the TVP Templeton Stock Fund is Templeton
Investment Counsel, Inc. and the investment adviser to the VIP Templeton Global
Growth Fund is Templeton Global Advisors Limited. When these two funds are
combined, the investment adviser will be Templeton Global Advisors Limited.
In connection with the combination of the TVP Templeton International Fund
and VIP Templeton International Equity Fund, we are proposing that Templeton
Investment Counsel, Inc., which is currently the VIP Fund's sub-adviser, act as
the investment adviser to the combined fund.
Templeton Investment Counsel, Inc. and Templeton Global Advisors Limited
are "sister" Templeton companies in the Franklin Templeton organization. Each
has access to substantially similar resources, including a global network of
research and support offices and services, as well as computer and
communication systems. In general, Franklin Templeton managers employ a similar
"bottom-up," focusing primarily on individual securities, long-term value
approach to stock selection.
In addition, the portfolio managers are the same for all pairs of the
corresponding funds, except in three pairs: (1) the TVP Templeton Asset
Allocation Fund and the VIP Templeton Global Asset Allocation Fund; (2) the TVP
Templeton International Fund and the VIP Templeton International Equity Fund;
and (3) the TVP Templeton Stock Fund and the VIP Templeton Global Growth Fund.
24
<PAGE>
Information about the portfolio managers for these three pairs of corresponding
funds and the combined funds is contained in Exhibit V.
WHO ARE THE FUNDS' INVESTMENT ADVISERS?
The following table names the investment adviser and sub-adviser to each
TVP Fund and its corresponding VIP Fund. In addition, the following table names
the investment adviser after the reorganization.
<TABLE>
<CAPTION>
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- -------------- -------------------- ------------
<S> <C> <C> <C> <C>
TVP Franklin Large Cap Franklin None N/A N/A
Growth Investments Fund Advisers, Inc.
VIP Franklin Large Cap Franklin None Franklin None
Growth Securities Fund Advisers, Inc. Advisers, Inc.
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- -------------- -------------------- ------------
TVP Franklin Small Cap Franklin None N/A N/A
Fund Advisers, Inc
VIP Franklin Small Cap Franklin None Franklin None
Fund Advisers, Inc. Advisers, Inc.
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- -------------- -------------------- ------------
TVP Mutual Shares Franklin None N/A N/A
Investments Fund Mutual
Advisers, LLC
VIP Mutual Shares Franklin None Franklin None
Securities Fund Mutual Mutual
Advisers, LLC Advisers, LLC
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- -------------- -------------------- ------------
TVP Templeton Asset Templeton None Templeton None
Allocation Fund Investment Investment
Counsel, Inc. Counsel, Inc.
VIP Templeton Global Templeton Templeton N/A N/A
Asset Allocation Fund Global Investment
Advisors Counsel, Inc.
Limited
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
TVP Templeton Bond Templeton None N/A N/A
Fund Investment
Counsel, Inc.
VIP Templeton Global Franklin Templeton Franklin Templeton
Income Securities Fund Advisers, Inc. Investment Advisers, Inc. Investment
Counsel, Inc. Counsel, Inc.
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
TVP Templeton Templeton None Templeton None
Developing Markets Fund Asset Asset
Management Management
Ltd. Ltd.
VIP Templeton Templeton None N/A N/A
Developing Markets Asset
Equity Fund Management
Ltd.
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
TVP Templeton Templeton None Templeton None
International Fund Investment Investment
Counsel, Inc. Counsel, Inc.
VIP Templeton Franklin Templeton N/A N/A
International Equity Fund Advisers, Inc. Investment
Counsel, Inc.
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
TVP Templeton Stock Templeton None N/A N/A
Fund Investment
Counsel, Inc.
VIP Templeton Global Templeton None Templeton None
Growth Fund Global Global
Advisors Advisors
Limited Limited
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
TVP Franklin S&P 500 Franklin State Street Franklin State Street
Index Fund Advisers, Inc. Global Advisers, Inc. Global
Advisors Advisors
VIP Franklin S&P 500 Franklin State Street N/A N/A
Index Fund (New) Advisers, Inc. Global
Advisors
COMBINED COMBINED
CURRENT CURRENT FUND FUND
INVESTMENT ADVISER SUB-ADVISER INVESTMENT ADVISER SUB-ADVISER
-------------------- --------------- -------------------- --------------
TVP Franklin Strategic Franklin Templeton Franklin Templeton
Income Investments Fund Advisers, Inc. Investment Advisers, Inc. Investment
Counsel, Inc. Counsel, Inc.
VIP Franklin Strategic Franklin Templeton N/A N/A
Income Securities Fund Advisers, Inc. Investment
(New) Counsel, Inc.
</TABLE>
COMPARISON OF FEES AND EXPENSES OF THE FUNDS
The fees and expenses of the TVP Funds and the VIP Funds include the
investment advisory and fund administration fees, other fees and expenses, and
distribution fees for the class 2 shares. We have detailed the fees and
expenses of the TVP Funds and VIP Funds on pages 7 and 8. Set forth below is a
narrative of the fees and expenses of the funds.
INVESTMENT ADVISORY AND FUND ADMINISTRATION FEES. Management fees are paid
to the investment advisers of the funds. For all the VIP Funds, except the VIP
Templeton Global Asset Allocation Fund, each fund's investment adviser also
provides services related to the day-to-day operations of the fund. Each
investment adviser contracts with an affiliate to provide fund administration
services. The TVP Funds and the VIP Global Asset Allocation Fund contract
directly with an affiliate to provide fund administration services. These
services include preparing and maintaining books, records and tax and financial
reports, and monitoring compliance with regulatory requirements. The fees for
fund administration services for the TVP Funds are based on the amount of the
TVP Trust's assets, while those for the VIP Fund are based on each VIP Fund's
assets. After the combination, this fee will be based upon each VIP Fund's
assets. As a result of this change, the combined Asset Allocation fund has only
slightly higher total annual operating expenses than those of the TVP Templeton
Asset Allocation Fund.
We are proposing that the policies and the investment advisers of the
larger corresponding funds survive after the reorganization. To do this, we
propose that the VIP Templeton Developing Markets Equity Fund, VIP Templeton
Global Asset Allocation Fund and VIP Templeton International Equity Fund
replace their advisory agreements with those in effect for the TVP Templeton
Developing Markets Fund, TVP Templeton Asset Allocation Fund and TVP Templeton
International Fund. Each of these investment advisory agreements will be
identical to those of the corresponding TVP Funds. After the combination of
these funds, no investment adviser will provide fund administration services.
27
<PAGE>
OTHER FEES AND EXPENSES. Other expenses of the funds include custody fees,
transfer agency costs, legal and accounting fees and printing costs.
The reorganization could potentially result in a decrease in some of these
expenses due to the operating efficiencies arising from the larger asset base.
These operating efficiencies relate primarily to fixed expenses, such as costs
of printing and fees for professional services such as legal and accounting
fees. With the larger asset base, shareholders should individually bear a
lesser portion of the cost of these fixed expenses. Expenses that are based on
a fund's asset value, such as fees charged as a percentage of a fund's assets,
or the number of transactions, such as custody and transfer agent fees, would
likely not decrease as a result of the reorganization. However, even with
respect to these types of expenses, the larger asset base may enable the fund
to negotiate lower overall fees.
DISTRIBUTION FEES. Each fund has two classes of shares available to
insurance companies. The class 2 shares have a separate distribution or "rule
12b-1" plan. These fees may be used to compensate the principal underwriter,
the insurance company shareholders 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. Currently, the 12b-1 fees for all TVP Funds and VIP Funds are
0.25% (prior to July 1, 1999 the 12b-1 fees for the VIP Funds were 0.30%).
However, in the case of the VIP Templeton Global Income Securities Fund class 2
shares, the rule 12b-1 fee is 0.25% as compared to the TVP Templeton Bond
Fund's charge of 0.15%. As a result of the combination of these two funds, the
class 2 shareholders of the TVP Templeton Bond Fund will pay a higher rule
12b-1 fee, but the combined fund is anticipated to have lower total annual fund
operating expenses.
28
<PAGE>
PROPOSAL 2: NEW INVESTMENT ADVISORY AGREEMENTS FOR THE VIP TEMPLETON
GLOBAL ASSET ALLOCATION FUND, VIP TEMPLETON DEVELOPING MARKETS
EQUITY FUND AND VIP TEMPLETON INTERNATIONAL EQUITY FUND
In connection with the reorganization, we are proposing that the
investment objectives, policies and strategies of the larger corresponding
funds survive within the VIP Trust. In addition, the combined funds will have
the same investment adviser and generally the same portfolio managers of the
larger corresponding funds. To do this, we propose that VIP Templeton
Developing Markets Equity Fund, VIP Templeton Global Asset Allocation Fund, and
the VIP Templeton International Equity Fund which are smaller than their
corresponding TVP Funds, replace their investment advisory agreements with
those in effect for the TVP Templeton Developing Markets Fund, TVP Templeton
Asset Allocation Fund, and the VIP Templeton International Equity Fund.
Information about these investment advisers and their officers and directors is
set forth in Exhibit V.
WILL THE MANAGEMENT CHANGE FOR THE VIP FUNDS WITH NEW INVESTMENT ADVISORY
AGREEMENTS?
For each of these VIP funds, the day-to-day management will remain the
same. For the VIP Templeton Developing Markets Equity Fund, the new agreement
will be with that fund's current investment adviser. For the VIP Templeton
Global Asset Allocation Fund and the VIP Templeton International Equity Fund,
the new agreements will be with their current sub-advisers.
Copies of the proposed investment advisory agreements for the VIP
Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity
Fund and VIP Templeton International Equity Fund are attached as Exhibits II,
III, and IV, respectively.
WHAT ARE THE TERMS OF THE EXISTING AND PROPOSED CONTRACTS FOR THE VIP FUNDS?
EXISTING CONTRACTS. The VIP Templeton Global Asset Allocation Fund has an
existing investment advisory agreement, and the VIP Templeton Developing
Markets Equity Fund and VIP Templeton International Equity Fund have existing
investment management contracts with the investment advisers named in the table
below. The table below also sets forth the dates of the contracts, dates the
shareholders approved the contracts and the dates the VIP Trustees last
approved these contracts.
<TABLE>
<CAPTION>
DATE LAST
DATE OF SOLE APPROVED BY
DATE OF SHAREHOLDER THE VIP
FUND INVESTMENT ADVISER CONTRACT APPROVAL TRUSTEES
- ---- ------------------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
VIP Templeton Global Asset Templeton Global 04-19-95 04-17-94 04-15-99
Allocation Fund Advisors Limited
VIP Templeton Developing Markets Templeton Asset 03-15-94* 03-15-94 04-15-99
Equity Fund Management, Ltd.
VIP Templeton International Equity Franklin Advisers, Inc. 01-27-92 01-23-92 04-15-99
Fund
</TABLE>
- ----------------
* The Board of Trustees authorized a revised agreement reflecting a corporate
consolidation of the investment adviser.
For the VIP Global Asset Allocation and VIP Templeton International Equity
Funds, the investment advisers have entered into sub-advisory agreements with
Templeton Investment Counsel, Inc. These sub-advisers are paid from the amounts
that the investment advisers receive.
By its terms, each existing investment adviser and sub-adviser contract
will continue in effect from year to year so long as approved annually by the
VIP Trustees (at a meeting called for that purpose) or by vote of a majority of
each fund's outstanding shares. In either case, renewal of the existing
investment advisory and sub-advisory contracts must be approved by a majority
of the trustees that satisfy the independence requirement under the federal
securities laws. The existing
29
<PAGE>
investment advisory and sub-advisory contracts are subject to termination
without penalty on 60 days' written notice by either party to the other and
will terminate automatically in the event of assignment.
Under the existing investment advisory and sub-advisory contracts, subject
to the control and supervision of the VIP Trustees, each investment adviser or
the sub-adviser:
o manages the investment and reinvestment of each fund's assets in
accordance with each fund's investment objectives and policies,
o makes all determinations with respect to buying, holding, and selling
the fund's securities, and
o exercises any investment security rights, including voting rights.
In performing duties under its existing investment advisory and sub-advisory
contract, each investment adviser or sub-adviser is required to comply with the
provisions of the VIP Trust's Agreement and Declaration of Trust and By-Laws
and each fund's stated investment objectives, policies and restrictions.
The existing investment advisory and sub-advisory contracts provide that
each investment adviser and sub-adviser will abide by each fund's brokerage
policies when selecting broker-dealers to execute portfolio transactions for
the fund. Although the services provided by broker-dealers may incidentally
help the investment adviser or sub-adviser reduce its expenses or otherwise
benefit the investment adviser or sub-adviser, its clients, its affiliates and
the fund, the value of these services is indeterminable and the investment
adviser's or the sub-adviser's fee is not reduced by any offsetting or
compensating arrangement.
Currently, the investment advisers for the VIP Templeton Developing
Markets Equity Fund and the VIP Templeton International Equity Fund are also
responsible for providing other services for the day-to-day operations of the
funds. The investment advisers contract with an affiliate to provide the
administration services to the funds. These services include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
The investment adviser for the VIP Templeton Global Asset Allocation Fund
is not required to furnish any personnel, overhead items or facilities to the
funds. The investment adviser does not provide trading desk facilities or daily
pricing of the fund's portfolios, although these services are provided to some
other investment companies by their investment advisers.
Each existing investment advisory and sub-advisory contract also provides
that each investment adviser or sub-adviser, its directors, officers, employees
or agents will have no liability to any fund or its shareholders for any error
in judgment, mistake of law, or for any loss arising out of any investment or
other act or omission in the performance of its duties, except for any
liability, loss or damage resulting from willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
For the fiscal year ended December 31, 1998, the investment advisers
received the following amounts:
FUND AMOUNT RECEIVED
- ---- ---------------
VIP Templeton Global Asset Allocation Fund ............ $ 585,747
VIP Templeton Developing Markets Equity Fund .......... $2,633,409
VIP Templeton International Equity Fund ............... $8,900,761
30
<PAGE>
For the fiscal year ended December 31, 1998, the sub-advisers received
from the investment advisers the following amounts:
FUND AMOUNT RECEIVED
- ---- ---------------
VIP Templeton Global Asset Allocation Fund .......... $175,133
VIP Templeton International Equity Fund ............. $561,199
PROPOSED CONTRACTS. The proposed contracts will generally be the same as
the contracts currently in effect for the corresponding TVP Funds. For each of
these VIP Funds, the proposed contract will be with the current investment
adviser to the corresponding TVP Fund. For the VIP Templeton Global Asset
Allocation Fund and the VIP Templeton International Equity Fund the proposed
contracts will be executed with Templeton Investment Counsel Inc., which
previously served as the sub-adviser to these funds. For the VIP Templeton
Developing Markets Equity Fund, the proposed contract will be executed with its
existing investment adviser, Templeton Asset Management Ltd.
The proposed contract for the VIP Templeton Global Asset Allocation Fund
will be the same as the investment advisory agreement currently in effect for
this fund. Under the proposed contract, the VIP Templeton Global Asset
Allocation Fund will pay the same fee to the investment adviser.
The proposed contract for the VIP Templeton International Equity Fund and
the VIP Templeton Developing Markets Equity Fund will be nearly the same as
their current contracts with regard to investment advisory services. Unlike the
current contracts, the proposed contracts no longer require the investment
adviser to provide fund administration services to the funds. Instead, these
services will be provided by an affiliate of the funds under a separate
contract.
The impact on total fees for the combined funds as a result of the new
investment advisory agreements is set forth below:
<TABLE>
<CAPTION>
TOTAL EXPENSES HIGHER OR TOTAL EXPENSES HIGHER OR
COMBINATION LOWER THAN THE TVP FUND LOWER THAN THE VIP FUND
- ------------------------ -------------------------- -------------------------
<S> <C> <C>
Asset Allocation Slightly Higher Lower
Developing Markets Lower Moderately Higher
International Lower Lower
</TABLE>
The slightly higher total fees for the combined Asset Allocation Fund over
those of the TVP Templeton Asset Allocation Fund are due to the change in the
basis on which fund administration services fees are calculated. The fund
administration services fees for the TVP Fund are based on the TVP Trust's
assets while those of the combined fund will be based on the combined fund's
assets. For the combined Developing Markets Fund, the increase is due to the
additional fund administration services fees that will be paid by the combined
fund. For the VIP Templeton Developing Markets Equity Fund, the fund
administration services fee was paid by the investment adviser out of its fund
management fee. For the combined fund, the fund administration services fee
will be paid separately by the combined fund. While the total fund operating
expenses of the Asset Allocation and Developing Markets combined funds may
potentially be higher than those of the current TVP Templeton Asset Allocation
Fund or the VIP Templeton Developing Markets Equity Fund, we believe that the
reorganization will provide other benefits from the combinations.
31
<PAGE>
For all of these VIP Funds, the proposed contracts will result in the fees
set forth below:
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
CURRENT FEE (ANNUAL RATE)* PROPOSED FEE (ANNUAL RATE)*
(DID NOT INCLUDE ADMINISTRATION SERVICES)** (WILL NOT INCLUDE ADMINISTRATION SERVICES)**
- --------------------------------------------- ---------------------------------------------
<S> <C>
0.65% up to and including $200 million 0.65% up to and including $200 million
0.585% over $200 million up to and 0.585% over $200 million up to and
including $1.3 billion including $1.3 billion
0.52% over $1.3 billion 0.52% over $1.3 billion
</TABLE>
- ----------------
* Based upon average daily net assets.
** The current and proposed contracts do not require the investment adviser to
provide administration services. The fund administration fees will not
change as a result of the adoption of a new investment advisory contract.
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
PROPOSED FEE
CURRENT FEE (ANNUAL RATE)* (ANNUAL RATE)* PROPOSED ADMINISTRATION FEE
(INCLUDED ADMINISTRATION SERVICES) (WILL NOT INCLUDE ADMINISTRATION SERVICES) (ANNUAL RATE)*
- ------------------------------------ -------------------------------------------- ---------------------------------
<S> <C> <C>
1.25% 1.25% 0.15% up to and including
$200 million
0.135% over $200 million, up to
and including $700 million
0.10% over $700 million, up to
and including $1.2 billion
0.075% over $1.2 billion
</TABLE>
- ----------------
* Based upon average daily net assets.
VIP TEMPLETON INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CURRENT FEE PROPOSED FEE
(ANNUAL RATE)* (ANNUAL RATE)* PROPOSED ADMINISTRATION FEE
(INCLUDED ADMINISTRATION SERVICES) (WILL NOT INCLUDE ADMINISTRATION SERVICES) (ANNUAL RATE)*
- ------------------------------------ -------------------------------------------- ---------------------------------
<S> <C> <C>
1.00% up to and including 0.75% up to and including 0.15% up to and including
$100 million $200 million $200 million
0.90% over $100 million up to 0.675% over $200 million up to 0.135% over $200 million, up to
and including $250 million and including $1.3 billion and including $700 million
0.80% over $250 million up to 0.60% over $1.3 billion 0.10% over $700 million, up to
and including $500 million and including $1.2 billion
0.75% over $500 million 0.075% over $1.2 billion
</TABLE>
- ----------------
* Based upon average daily net assets.
If approved, the proposed contracts will become effective May 1, 2000 and
continue in effect until April 30, 2002, and thereafter from year to year as
long as approved annually by (1) the VIP Trustees and a majority of the
independent trustees at a meeting called for that purpose or (2) a vote of the
fund's shareholders.
COMPARISON OF FEES AND EXPENSES UNDER THE EXISTING AGREEMENTS AND THE
PROPOSED AGREEMENTS. The following table shows a comparison of fees and
expenses that the VIP Templeton Global Asset Allocation Fund, VIP Templeton
Developing Markets Equity Fund and VIP Templeton International
32
<PAGE>
Equity Fund incurred during the fiscal year ended December 31, 1998, and the
fees and expenses the funds would have incurred if the proposed contracts and
the fund combinations would have been in effect during that same period.
<TABLE>
<CAPTION>
VIP TEMPLETON GLOBAL VIP TEMPLETON DEVELOPING
ASSETS ALLOCATION FUND MARKETS EQUITY FUND
------------------------------- -------------------------------
CLASS 1 CLASS 2 CLASS 1 CLASS 2
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
FEE RATES PAID BY THE FUND TO THE
INVESTMENT ADVISER
Current Investment Advisory Fee ........ 0.60% 0.60% 1.25% 1.25%
Proposed Investment Advisory Fee........ 0.60% 0.60% 1.25% 1.25%
Change ................................. 0% 0% 0% 0%
Current Fund Administration Fee ........ 0.13% 0.13% 0% 0%
Proposed Fund Administration Fee........ 0.13% 0.13% 0.14% 0.14%
Administration Fee Change .............. 0% 0% 0.14% 0.14%
Total Current Fee Rate Paid to the
Investment Adviser .................... 0.60% 0.60% 1.25% 1.25%
Total Proposed Fee Rate Paid to
the Investment Adviser ................ 0.60% 0.60% 1.25% 1.25%
Change ................................. 0% 0% 0% 0%
FEES RATES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ........ 0.13% 0.13% 0% 0%
Proposed Fund Administration Fee........ 0.13% 0.13% 0.14% 0.14%
Change ................................. 0% 0% 0.14% 0.14%
TOTAL FEES PAID BY THE FUND TO THE
INVESTMENT ADVISER
Current Investment Advisory Fee ........ $ 5,027,461 $5,027,461 $ 4,888,592 $4,888,592
Current Fund Administration Fee ........ $ 1,112,173 $1,112,173 $ 0 $ 0
------------ ---------- ------------ ----------
TOTAL CURRENT .......................... $ 6,139,634 $6,139,634 $ 4,888,592 $4,888,592
Proposed Investment Advisory Fee........ $ 5,027,461 $5,027,461 $ 4,888,592 $4,888,592
Proposed Fund Administration Fee........ $ 1,112,173 $1,112,173 $ 557,968 $ 557,968
------------ ---------- ------------ ----------
TOTAL PROPOSED ......................... $ 6,139,634 $6,139,634 $ 5,446,560 $5,446,560
DIFFERENCE BETWEEN PROPOSED
AND CURRENT ............................ 0 0 $ 557,968 $ 557,968
DIFFERENCE BETWEEN PROPOSED AND
CURRENT AS A PERCENTAGE ................ 0% 0% 11% 11%
TOTAL FEES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ........ $ 1,112,173 $1,112,173 $ 0 $ 0
Proposed Fund Administration Fee........ $ 1,112,173 $1,112,173 $ 557,968 $ 557,968
------------ ---------- ------------ ----------
Change ................................. $ 0 $ 0 $ 557,968 $ 557,968
TOTAL INVESTMENT ADVISORY AND FUND
ADMINISTRATION FEES
Current Agreements ..................... $ 6,139,634 $6,139,634 $ 4,888,592 $4,888,592
Proposed Agreements .................... $ 6,139,634 $6,139,634 $ 5,446,560 $5,446,560
DIFFERENCE BETWEEN AGGREGATE
AMOUNTS ................................ $ 0 $ 0 $ 557,968 $ 557,968
AVERAGE NET ASSETS OF FUND FOR FISCAL
YEAR ENDED DECEMBER 31, 1998 ........... $ 90,114,852 $ 0 $210,672,688 $ 0
============ ========== ============ ==========
AVERAGE NET ASSETS OF COMBINED
FUND FOR FISCAL YEAR ENDED
DECEMBER 31, 1998 ...................... $837,172,833 $ 0 $391,087,358 $ 0
============ ========== ============ ==========
<CAPTION>
VIP TEMPLETON INTERNATIONAL
EQUITY FUND
------------------------------------
CLASS 1 CLASS 2
------------------- ----------------
<S> <C> <C>
FEE RATES PAID BY THE FUND TO THE
INVESTMENT ADVISER
Current Investment Advisory Fee ........ 0.78% 0.78%
Proposed Investment Advisory Fee........ 0.65% 0.65%
Change ................................. (0.13)% (0.13)%
Current Fund Administration Fee ........ 0% 0%
Proposed Fund Administration Fee........ 0.10% 0.10%
Administration Fee Change .............. 0.10% 0.10%
Total Current Fee Rate Paid to the
Investment Adviser .................... 0.80% 0.80%
Total Proposed Fee Rate Paid to
the Investment Adviser ................ 0.65% 0.65%
Change ................................. (0.15)% (0.15)%
FEES RATES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ........ 0% 0%
Proposed Fund Administration Fee........ 0.10% 0.10%
Change ................................. 0.10% 0.10%
TOTAL FEES PAID BY THE FUND TO THE
INVESTMENT ADVISER
Current Investment Advisory Fee ........ $ 16,643,438 $16,643,438
Current Fund Administration Fee ........ $ 0 $ 0
------------- -----------
TOTAL CURRENT .......................... $ 16,643,438 $16,643,438
Proposed Investment Advisory Fee........ $ 13,959,750 $13,959,750
Proposed Fund Administration Fee........ $ 2,179,344 $2,179,344
------------- -----------
TOTAL PROPOSED ......................... $ 16,139,094 $16,139,094
DIFFERENCE BETWEEN PROPOSED
AND CURRENT ............................ $ (504,344) $ (504,344)
DIFFERENCE BETWEEN PROPOSED AND
CURRENT AS A PERCENTAGE ................ (3)% (3)%
TOTAL FEES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ........ $ 0 $ 0
Proposed Fund Administration Fee........ $ 2,179,344 $2,179,344
------------- -----------
Change ................................. $ 2,179,344 $2,179,344
TOTAL INVESTMENT ADVISORY AND FUND
ADMINISTRATION FEES
Current Agreements ..................... $ 16,643,438 $16,643,438
Proposed Agreements .................... $ 16,139,094 $16,139,094
DIFFERENCE BETWEEN AGGREGATE
AMOUNTS ................................ $ (504,344) $ (504,344)
AVERAGE NET ASSETS OF FUND FOR FISCAL
YEAR ENDED DECEMBER 31, 1998 ........... $1,106,768,060 $ 0
============== ===========
AVERAGE NET ASSETS OF COMBINED
FUND FOR FISCAL YEAR ENDED
DECEMBER 31, 1998 ...................... $2,139,125,017 $ 0
============== ===========
</TABLE>
33
<PAGE>
WHAT FEES DO THE INVESTMENT ADVISERS RECEIVE FROM FUNDS SIMILAR TO THE VIP
FUNDS?
Templeton Investment Counsel, Inc. does not serve as investment manager or
sub-adviser to other U.S. registered investment companies that have an
investment objective similar to that of the VIP Templeton Global Asset
Allocation Fund after the reorganization.
Templeton Asset Management Ltd.--Hong Kong Branch, also serves as
investment manager or sub-adviser to one other U.S. registered investment
company that has an investment objective similar to that of the VIP Templeton
Developing Markets Equity Fund after the reorganization. In this capacity, it
receives and expects to receive from this investment company the following
investment management fees:
<TABLE>
<CAPTION>
APPROXIMATE INVESTMENT
NET ASSETS AS OF MANAGEMENT FEE
INVESTMENT COMPANY NOVEMBER 30, 1999 (ANNUAL RATE)*
- ---------------------------------------------- ------------------- ---------------
<S> <C> <C>
Templeton Developing Markets Trust ......... $3,116,015,105 1.25%
</TABLE>
REASONS FOR PROPOSALS 1 AND 2
WHY ARE WE PROPOSING THE REORGANIZATION?
In 1992, the Franklin and Templeton organizations joined forces. Prior to
this time, Franklin and Templeton each had separate trusts offering mutual
funds dedicated to insurance companies, the TVP Trust and the VIP Trust. The
VIP Funds have been offered in connection with insurance products issued by one
insurance company, while the TVP Funds are offered in connection with products
issued by other insurance companies. The TVP Trust and the VIP Trust include
many substantially similar mutual funds generally having the same investment
objectives and very similar investment policies and strategies. In most cases,
the portfolio managers are also the same. The duplicate funds and related
expenses have no clear benefits to shareholders. To eliminate this duplication,
we are proposing the reorganization. This could enable Franklin Templeton to
realize operating efficiencies by maintaining a single trust of mutual funds to
be offered in connection with insurance products and employee benefit plans.
These operating efficiencies would also benefit shareholders and are expected
to pass through to you.
WHAT FACTORS DID THE TVP TRUSTEES CONSIDER PRIOR TO RECOMMENDING APPROVAL OF
THE REORGANIZATION?
In determining whether or not it was appropriate to approve the
reorganization and to recommend approval to shareholders, the TVP Trustees
considered various matters and extensive information provided by Franklin
Templeton management and the Trust's legal counsel. The nature of the matters
considered and the standards used by the TVP Trustees in reaching their
decision were reviewed by the TVP Trust's special legal counsel, Jorden Burt
Boros Cicchetti Berenson & Johnson LLP and Bleakley Platt & Schmidt, legal
counsel to the independent TVP Trustees. After review and discussions of the
information provided, the independent TVP Trustees determined separately to
discuss the information and consider the factors to be weighed and standards to
be applied in evaluating the proposed fee increase.
During its meetings in October, and December of 1999, the TVP Trustees
received detailed information about the reorganization, including:
o detailed information about the funds which included comparisons of the
corresponding funds that highlighted the number of similarities
between them, and identified any notable differences;
o the reasons for the reorganization;
34
<PAGE>
o the structure of the reorganization; and
o the potential impact of the reorganization on the TVP Trust, VIP
Trust, their shareholders, including the shareholders' interest in the
impact, if any, on the owners of the variable annuity and variable
life contracts.
REASONS FOR THE REORGANIZATION. The TVP Trustees reviewed the background
underlying the existence of the two trusts that offered mutual funds to
insurance companies. Using the detailed comparisons of the funds, the TVP
Trustees looked at the corresponding TVP Funds and VIP Funds and determined
that they were nearly identical. Franklin Templeton management informed the TVP
Trustees that the reorganization would potentially result in cost savings and
certain other portfolio advantages arising from having larger pools of assets
to invest. In addition, the TVP Trustees learned that these operational
efficiencies may lead to better performance of the combined corresponding funds
than the performance that could be expected for the TVP Fund or the VIP Fund on
a stand alone basis.
STRUCTURE OF THE REORGANIZATION. The TVP Trustees reviewed detailed
information about the manner in which the reorganization would be accomplished.
The TVP Trustees considered whether the TVP Trust or the VIP Trust should
continue after the reorganization. In addition, the TVP Trustees addressed
which funds' characteristics should continue after the reorganization.
The TVP Trustees looked at various factors to determine which entity
should continue after the reorganization. In reviewing comparisons of the TVP
Funds and the VIP Funds, the TVP Trustees found that in five of eight instances
the VIP Funds were larger. Counsel informed the TVP Trustees that larger funds
are generally considered the survivor in a fund reorganization under legal and
accounting principles and precedent. Moreover, the TVP Trustees received
information showing that the VIP Trust has a greater number of funds than the
TVP Trust.
The TVP Trustees examined the detailed comparisons of the TVP Funds and
VIP Funds to determine which funds' characteristics should continue after the
reorganization. These comparisons included information about the funds' size,
age, investment objectives and policies, investment adviser and sub-adviser,
portfolio managers, and expense ratios, along with other information. These
comparisons showed that the corresponding funds' (1) investment objectives and
policies, (2) investment advisers responsible for the day-to-day management,
and (3) portfolio managers were the same in most cases. All the VIP Funds are
larger than the corresponding TVP Funds, except that the TVP Templeton Asset
Allocation Fund, TVP Templeton Developing Markets Fund and the TVP Templeton
International Fund are larger than the corresponding VIP Funds. The fund
comparisons also showed that generally the larger funds have lower expense
ratios, except for the TVP Templeton Developing Markets Fund. In addition, the
performance comparison showed that the larger corresponding funds generally had
the better performance.
Counsel informed the TVP Trustees that if the characteristics of any TVP
Fund were selected to survive, this would require the corresponding VIP Fund to
adopt the major characteristics of the TVP Fund. This includes adopting the
investment advisory agreement of the TVP Fund. The TVP Trustees considered the
similarities of the TVP Templeton Asset Allocation Fund, Templeton Developing
Markets Fund and the Templeton International Fund and the corresponding VIP
Funds.
POTENTIAL IMPACT. In reviewing the potential impact of the reorganization,
the TVP Trustees considered the interests of the TVP Trust's shareholders and
the shareholders' considerations of the owners of the variable annuity and
variable life contracts.
o COMPARABILITY OF THE FUNDS. The fund comparisons highlighted the
similarities between the corresponding funds' investment objectives and
policies. The TVP Trustees noted some minor differences. These occur with
(1) the TVP Templeton Asset Allocation Fund and the VIP Templeton Global
Asset Allocation Fund, and (2) the TVP Templeton Bond Fund and VIP
Templeton Global Income Securities Fund.
35
<PAGE>
The TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset
Allocation Fund have two differences. First, the VIP Fund may invest up to
25% of its assets in higher yielding, medium and lower-rated debt
securities, while the TVP Fund may only invest 15% of its assets in these
securities. Second, the VIP Fund is restricted from investing in defaulted
debt securities.
The TVP Templeton Bond Fund and the VIP Templeton Global Income Securities
Fund have two differences. First, the VIP Fund may invest up to 30% of its
assets in higher yielding, medium and lower-rated debt securities, while
the TVP Fund's ability to invest in these securities is not limited.
Second, the VIP Fund is restricted from investing in defaulted debt
securities.
Because the characteristics of the TVP Templeton Asset Allocation Fund
would survive the reorganization, there would be no impact on its
shareholders. For the TVP Templeton Bond Fund, the TVP Trustees found that
these differences are very minor and/or are of no practical significance.
The TVP Trustees determined that the shareholders of the TVP Templeton
Bond Fund would benefit overall by the combination with the VIP Templeton
Global Income Securities Fund.
o COMPARABILITY OF THE FUNDS' MANAGEMENT. The TVP Trustees notedthat all the
corresponding funds' day-to-day management is the same except for the TVP
Templeton Stock Fund and the VIP Templeton Global Growth Fund.
The investment adviser to the TVP Templeton Stock Fund is Templeton
Investment Counsel, Inc. and the investment adviser to the VIP Templeton
Global Growth Fund is Templeton Global Advisors Limited. The TVP Trustees
reviewed information about Templeton Global Advisors Limited, including
the fact that Templeton Investment Counsel, Inc. and Templeton Global
Advisors Limited are part of the Franklin Templeton group of investment
advisory firms with access to substantially similar resources. The TVP
Trustees noted that since its inception in 1994 the VIP Templeton Global
Growth Fund has outperformed or had essentially the same performance as
the TVP Stock Fund, while assessing lower overall management fees.
For the TVP Franklin S&P 500 Index Fund and the TVP Franklin Strategic
Income Investments Fund, the TVP Trustees noted that the new
corresponding VIP funds would have the same characteristics of these
funds, including the same investment advisers and sub-advisers.
o EXPENSES OF THE FUNDS. The TVP Trustees compared the expenses of
the corresponding funds and reviewed the anticipated expense ratios of
the combined funds. The TVP Trustees noted that fund comparisons showed
that all the larger funds, except for the TVP Templeton Developing
Markets Fund, had the same or lower expense ratios. The TVP Trustees
found that the expense ratios of the combined funds were lower than the
ratios for the TVP Funds, except for a slight increase in the combined
fund for the TVP Templeton Asset Allocation Fund. The TVP Trustees
considered the differential in the rule 12b-1 fees for class 2 shares of
the TVP Templeton Bond Fund and the VIP Templeton Global Income
Securities Fund. Total annual fund operating expenses for the combined
fund, however, are expected to slightly decrease. The TVP Trustees
considered all of the other benefits of the reorganization, and
determined that these benefits outweighed the slight increase in the
expense ratio for the TVP Templeton Asset Allocation Fund, and the slight
increase in the rule 12b-1 fees for class 2 shares of the TVP Templeton
Bond Fund.
o PERFORMANCE OF THE FUNDS. The TVP Trustees compared the historical
investment performance records of the corresponding funds. The
performance of each of the TVP Funds and VIP Funds as of September 30,
1999, which appears on pages 13-14. The TVP Trustees
36
<PAGE>
noted that the larger corresponding funds had the better performance
history. Any differences in performance were attributed to differences in
asset sizes and cash flows. Due to the substantial similarities in
investment objectives and policies, the TVP Trustees were informed that
over time the corresponding funds could be expected to perform similarly,
though not identically. In addition, the TVP Trustees were informed that
due to the anticipated cost savings from the reorganization, it was
expected that the combined funds would have better performance than the
performance that could be expected for the TVP Fund or the VIP Fund on a
stand alone basis.
o TAX CONSEQUENCES. The TVP Trustees were informed that the reorganization
plan was anticipated to be tax-free.
o IMPACT ON CONTRACT VALUES. The TVP Trustees were told that the
reorganization would not impact the contract owners' values because the
exchange of shares would be made at the corresponding funds' net asset
values. Moreover, the separate accounts through which the contracts are
funded would not change except for the fund in which the separate
accounts invest. After the reorganization, the contract owners' values
would vary based upon the investment experience of the combined funds in
the VIP Trust. The TVP Trustees were informed that the insurance company
shareholders of the TVP Funds would take all action necessary to ensure
that the interests of the contract owners will be duly and validly
recorded on the books and records of the insurance company shareholders.
WHAT FACTORS DID THE VIP TRUSTEES CONSIDER?
In determining whether or not it was appropriate to approve the
reorganization which includes adopting the proposed investment advisory
agreements and to recommend approval to shareholders, the VIP Trustees
considered various matters and extensive information provided by Franklin
Templeton management and the VIP Trust's legal counsel. The nature of the
matters to be considered and the standards to be used by the VIP Trustees in
reaching their decision were reviewed by the VIP Trust's special legal counsel,
Jorden Burt Boros Cicchetti Berenson & Johnson LLP, and Bleakley Platt &
Schmidt, legal counsel to the independent VIP Trustees. After review and
discussions of the information provided, the independent VIP Trustees
determined separately to discuss the information and consider the factors to be
weighed and standards to be applied in evaluating the proposed agreements.
At meetings held in October and December 1999, the VIP Trustees considered
substantially the same information as was considered by the TVP Trustees. VIP
Trustees considered the similarities between the TVP Templeton Asset Allocation
Fund, Templeton Developing Markets Fund and the Templeton International Fund
and the corresponding VIP Funds to determine if these VIP Funds should adopt
new investment advisory agreements. The VIP Trustees noted that the investment
objectives were the same and the investment advisers of each of these VIP
Funds, who would be responsible for the day-to-day management, would also be
the same.
The VIP Trustees noted that the proposed contract for the VIP Templeton
Global Asset Allocation Fund will be the same as the investment advisory
agreements currently in effect for this fund. Under the proposed contract, the
VIP Templeton Global Asset Allocation Fund will pay the same fee to the
investment adviser The VIP Trustees were informed that after the combination,
the total annual operating expenses are anticipated to be lower than those of
the VIP Fund.
The VIP Trustees found that the proposed contract for the VIP Templeton
International Equity Fund and the VIP Templeton Developing Markets Equity Fund
will be nearly the same as their current contracts, except that the investment
adviser would no longer be providing fund administration services to the funds.
The VIP Trustees also reviewed the expense ratios of the combined funds. As a
result of the new agreements, the fees for the proposed investment advisory
contract and the administration service contract for the VIP Templeton
International Fund will be lower than the amounts under the current contract.
37
<PAGE>
For the VIP Templeton Developing Markets Equity Fund, however, the change
was expected to result in moderately higher total annual fund operating
expenses. The increase is due to the separate fee for the fund administration
services contract that the combined fund will pay, while paying the same fee to
the investment adviser. Currently, the fee paid to the investment adviser
includes an amount for fund administration services. Because the combined fund
will pay this new separate fee, the VIP Trustees recognized that the investment
advisory fee would effectively increase. The VIP Trustees reviewed information
comparing the total operating fund expenses of the combined Developing Markets
Fund with those of similar funds. This information showed that the current
total fund operating expenses of the VIP Fund were generally lower than similar
funds and that these expenses for the combined fund would continue to be lower
than similar funds. In addition, the VIP Trustees compared the performance of
the VIP Templeton Developing Markets Equity Fund with that of similar funds.
Also, the VIP Trustees considered the expertise of and the services provided by
the investment adviser. The VIP Trustees recognized that the investment adviser
had established an extensive global network of research resources which
includes a global research team traveling extensively throughout the world,
visiting issuers and developing research ideas. The effective increase would
also assist the investment adviser in retaining and attracting capable
personnel. The VIP Trustees considered all of the other benefits of the
reorganization, and determined that these benefits outweighed the modest
increases in expense ratios.
At this meeting the VIP Trustees also considered proposals that are
appropriate to the reorganization to change and eliminate certain fundamental
investment restrictions for the VIP Templeton Global Asset Allocation Fund, VIP
Templeton Developing Markets Fund and VIP Templeton International Equity Fund.
These proposals and the VIP Trustees consideration of these proposals are
described in proposals 3 and 4 of this document.
CONCLUSION
o The TVP Trustees recommend that shareholders vote "FOR" approval of the
combination as to each TVP Fund, with the corresponding VIP Fund as
described in this document.
o The VIP Trustees recommend that shareholders of the VIP Trust Templeton
Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and
Templeton International Equity Fund vote "FOR" approval of the new
investment advisory agreements.
INFORMATION ABOUT THE REORGANIZATION
HOW WILL THE REORGANIZATION WORK?
The reorganization will be completed through two principal steps --
creating two new funds for the VIP Trust and eliminating duplicate funds. As
part of the reorganization, certain VIP Funds will adopt new investment
advisory agreements and will amend or eliminate some of their fundamental
investment restrictions.
To eliminate the duplicate funds, we propose that:
o The TVP Trust transfer all of its assets and liabilities to the VIP
Trust;
o The VIP Trust issue shares of the VIP Funds which correspond to the
TVP Funds in exchange for the TVP Trust's assets and liabilities;
o The TVP Trust distribute shares of the corresponding VIP Funds to
shareholders of the TVP Trust; and
o The TVP Trust be dissolved.
38
<PAGE>
HOW WILL THE SHARES BE EXCHANGED AND DISTRIBUTED?
In exchange for the transferred assets and liabilities of the TVP Funds,
the VIP Trust will issue shares of the corresponding VIP Funds. The VIP Trust
will issue the number of full or fractional shares equal to the dollar value of
the shares of the corresponding TVP Fund that are outstanding immediately
before the reorganization. The shareholders of class 1 shares of the TVP Trust
will receive class 1 shares of the corresponding VIP Fund. The shareholders of
class 2 shares of the TVP Trust will receive class 2 shares of the
corresponding VIP Fund. The shareholder of class 3 shares of the TVP Trust will
receive class 3 shares of the corresponding VIP Fund. TVP Trust shareholders
will also receive any unpaid dividends or distributions that would be declared
before the reorganization of the TVP Trust. The VIP Trust will establish an
account for each shareholder of the TVP Trust reflecting the number of VIP Fund
shares distributed to that shareholder. The VIP Trust will not issue share
certificates.
WHAT WILL HAPPEN WITH THE TVP FRANKLIN S&P 500 INDEX FUND AND THE TVP FRANKLIN
STRATEGIC INCOME INVESTMENTS FUND?
Two new VIP Funds will be created with the same features of the TVP
Franklin S&P 500 Index and TVP Franklin Strategic Income Investments Funds. The
VIP Trust has taken all actions required by state law and its controlling trust
documents to establish the new VIP Funds. The new VIP Funds thus will be
eligible to receive the assets of the corresponding TVP Funds. The VIP Trust
will file a registration statement to add these two new funds. Because the VIP
Funds will adopt the features of the current corresponding TVP Funds, the
registration for the new VIP Funds is not anticipated to be materially
different from those of the TVP Funds. The SEC must declare this registration
statement effective prior to or concurrent with the reorganization.
CAN THE REORGANIZATION BE DELAYED OR TERMINATED?
Yes. In order for us to complete the reorganization, all the conditions
contained in a reorganization agreement between the TVP Trust and VIP Trust
must be satisfied.
One condition is your approval of the reorganization. We are required to
obtain approval of the reorganization from each of the TVP Fund's shareholders,
and for the TVP Templeton Bond Fund, by each class of its shareholders. If we
do not receive enough votes for the reorganization of any TVP Fund, the
reorganization will not be completed for that TVP Fund. In such case, we will
consider what further action is appropriate for that TVP Fund. We are also
required to obtain separate approval from the shareholders of each VIP Fund for
which we propose to adopt a new investment advisory agreement. If we do not
receive enough votes for the approval of the new investment advisory agreement
from the shareholders of any of the applicable VIP Funds, we will complete the
reorganization. The old investment advisory agreement will continue in effect
for the combined corresponding funds. Finally, we are seeking approval to
change the fundamental investment restrictions for certain VIP Funds. If we do
not receive enough votes for proposals 3 and 4, we will complete the
reorganization, but the current fundamental investment restrictions will
continue to apply.
The TVP Trust and VIP Trust may agree to terminate the reorganization at
any time, before or after approval by shareholders. In addition, if any
condition in the agreement that benefits the VIP Trust has not been satisfied,
the VIP Trust may terminate the reorganization, unless the VIP Trust agrees to
waive the condition. Likewise, if any condition in the agreement that benefits
the TVP Trust has not been satisfied, then the TVP Trust may terminate the
reorganization, unless the TVP Trust agrees to waive the condition.
WHAT ARE THE TAX CONSEQUENCES?
In the opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP,
special counsel to the TVP Trust and the VIP Trust, based upon certain
assumptions and representations, it is not expected
39
<PAGE>
that shareholders of the TVP Funds will recognize any gain or loss for federal
income tax purposes as a result of the exchange of their shares of the TVP
Funds for shares of the corresponding VIP Funds or that VIP Trust will
recognize any gain or loss upon receipt of the assets of the TVP Funds.
The TVP Trust and VIP Trust have not sought, and will not seek, a private
letter ruling from the Internal Revenue Service (IRS) with respect to the
federal income tax consequences of the reorganization. The opinion of Jorden
Burt Boros Cicchetti Berenson & Johnson LLP with respect to the tax
consequences of the reorganization is not binding on the IRS and does not
preclude the IRS from adopting a contrary position. Shareholders and contract
owners should consult their own tax advisers concerning the potential tax
consequences of the reorganization to them, including any applicable foreign,
state or local income tax consequences.
WHO WILL PAY THE EXPENSES?
The TVP Trust and VIP Trust have agreed that the cost to accomplish the
reorganization will be split among the TVP Trust and VIP Trust and the
investment advisers to the funds. These costs include costs of obtaining the
necessary approvals for the reorganization, as well as legal fees and
accounting fees for preparing this document, fees for mailing this document and
expenses for holding the special meetings.
HOW WOULD THE REORGANIZATION CHANGE THE FUNDS' STATEMENT OF CAPITAL?
The following tables show the capitalization of the TVP Funds and the
corresponding VIP Funds as of June 30, 1999 and on a pro forma basis as of that
date giving effect to the proposed reorganization.
<TABLE>
<CAPTION>
VIP FRANKLIN LARGE
TVP FRANKLIN LARGE CAP CAP GROWTH SECURITIES
GROWTH INVESTMENTS FUND FUND PRO FORMA
------------------------- ---------------------- ---------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $488,589 $355,536,656 $356,025,245
Class 2 ................ N/A 307,406 307,406
NET ASSET VALUE PER SHARE
Class 1 ................ $ 13.13 $ 18.06 $ 18.06
Class 2 ................ N/A $ 18.02 $ 18.02
SHARES OUTSTANDING
Class 1 ................ 37,220 19,689,451 19,716,505
Class 2 ................ N/A 17,055 17,055
</TABLE>
<TABLE>
<CAPTION>
TVP FRANKLIN SMALL CAP VIP FRANKLIN SMALL CAP
INVESTMENTS FUND FUND PRO FORMA
------------------------ ----------------------- ---------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $ 482,735 $299,177,022 $299,659,757
Class 2 ................ $19,867,737 $ 78,214 $ 19,945,951
NET ASSET VALUE PER SHARE
Class 1 ................ $ 10.74 $ 15.98 $ 15.98
Class 2 ................ $ 10.73 $ 15.95 $ 15.95
SHARES OUTSTANDING
Class 1 ................ 44,934 18,724,755 18,754,964
Class 2 ................ 1,852,384 4,903 1,250,529
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
TVP MUTUAL SHARES INVESTMENTS VIP MUTUAL SHARES
FUND SECURITIES FUND PRO FORMA
------------------------------ ------------------- ---------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $2,456,111 $496,887,152 $499,343,263
Class 2 ................ $1,210,949 $ 442,187 $ 1,653,136
NET ASSET VALUE PER SHARE
Class 1 ................ $ 11.16 $ 13.70 $ 13.70
Class 2 ................ $ 11.15 $ 13.68 $ 13.68
SHARES OUTSTANDING
Class 1 ................ 220,178 36,256,033 36,435,311
Class 2 ................ 108,637 32,326 120,846
</TABLE>
<TABLE>
<CAPTION>
TVP TEMPLETON ASSET VIP TEMPLETON GLOBAL
ALLOCATION FUND ASSET ALLOCATION FUND PRO FORMA
--------------------- ----------------------- ---------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $660,891,561 $70,553,184 $731,444,745
Class 2 ................ $ 15,490,118 $ 43,061 $ 15,533,179
NET ASSET VALUE PER SHARE
Class 1 ................ $ 21.11 $ 13.32 $ 13.32
Class 2 ................ $ 21.05 $ 13.29 $ 13.29
SHARES OUTSTANDING
Class 1 ................ 31,309,340 5,297,517 54,914,001
Class 2 ................ 735,922 3,239 1,168,786
</TABLE>
<TABLE>
<CAPTION>
VIP TEMPLETON GLOBAL
TVP TEMPLETON BOND FUND INCOME SECURITIES FUND PRO FORMA
------------------------- ------------------------ ---------------
<S> <C> <C> <C>
NET ASSETS ........................
Class 1 .......................... $23,523,321 $113,608,897 $137,132,218
Class 2 .......................... $ 289,795 $ 82,432 $ 372,227
NET ASSET VALUE PER SHARE .........
Class 1 .......................... $ 10.04 $ 12.20 $ 12.20
Class 2 .......................... $ 10.03 $ 12.18 $ 12.18
SHARES OUTSTANDING ................
Class 1 .......................... 2,343,325 9,311,962 11,240,103
Class 2 .......................... 28,891 6,766 30,559
</TABLE>
<TABLE>
<CAPTION>
VIP TEMPLETON
TVP TEMPLETON DEVELOPING DEVELOPING MARKETS
MARKETS FUND EQUITY FUND PRO FORMA
-------------------------- ------------------- ---------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $268,035,925 $188,802,531 $456,838,456
Class 2 ................ $ 35,071,995 $ 587,362 $ 35,659,357
NET ASSET VALUE PER SHARE
Class 1 ................ $ 7.23 $ 9.39 $ 9.39
Class 2 ................ $ 7.21 $ 9.38 $ 9.38
SHARES OUTSTANDING
Class 1 ................ 37,062,731 20,102,042 48,646,869
Class 2 ................ 4,862,951 62,613 3,801,632
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
VIP TEMPLETON
TVP TEMPLETON INTERNATIONAL INTERNATIONAL EQUITY
FUND FUND PRO FORMA
----------------------------- --------------------- -----------------
<S> <C> <C> <C>
NET ASSETS ........................
Class 1 .......................... $996,310,751 $824,805,932 $1,821,116,683
Class 2 .......................... $ 81,169,758 $ 4,293,014 $ 85,462,772
NET ASSET VALUE PER SHARE .........
Class 1 .......................... $ 19.85 $ 17.30 $ 17.30
Class 2 .......................... $ 19.77 $ 17.27 $ 17.27
SHARES OUTSTANDING ................
Class 1 ................ ......... 50,203,995 47,685,867 105,276,084
Class 2 .......................... 4,105,074 248,579 4,948,623
</TABLE>
<TABLE>
<CAPTION>
VIP TEMPLETON GLOBAL
TVP TEMPLETON STOCK FUND GROWTH FUND PRO FORMA
-------------------------- --------------------- -----------------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ $620,428,154 $732,163,775 $1,352,591,929
Class 2 ................ $ 27,435,349 $ 1,481,045 $ 28,916,394
NET ASSET VALUE PER SHARE
Class 1 ................ $ 21.28 $ 16.54 $ 16.54
Class 2 ................ $ 21.21 $ 16.52 $ 16.52
SHARES OUTSTANDING
Class 1 ................ 29,158,278 44,256,213 81,766,984
Class 2 ................ 1,293,337 89,660 1,750,395
</TABLE>
<TABLE>
<CAPTION>
TVP FRANKLIN S&P 500 INDEX VIP FRANKLIN S&P 500
FUND INDEX FUND PRO FORMA
---------------------------- --------------------- ----------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
Class 3 ................ N/A N/A N/A
NET ASSET VALUE PER SHARE
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
Class 3 ................ N/A N/A N/A
SHARES OUTSTANDING
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
Class 3 ................ N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
TVP FRANKLIN STRATEGIC INCOME VIP FRANKLIN STRATEGIC
INVESTMENTS FUND INCOME SECURITIES FUND PRO FORMA
------------------------------- ------------------------ ----------
<S> <C> <C> <C>
NET ASSETS
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
NET ASSET VALUE PER SHARE
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
SHARES OUTSTANDING
Class 1 ................ N/A N/A N/A
Class 2 ................ N/A N/A N/A
</TABLE>
42
<PAGE>
PROPOSALS 3 & 4 -- CHANGES TO THE FUNDAMENTAL
INVESTMENT RESTRICTIONS OF THE
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND,
TEMPLETON DEVELOPING MARKETS EQUITY FUND AND
TEMPLETON INTERNATIONAL EQUITY FUND
INTRODUCTION
WHY ARE WE PROPOSING AMENDMENTS TO OR ELIMINATING CERTAIN FUNDAMENTAL
INVESTMENT RESTRICTIONS?
Recent changes in federal law no longer require certain investment
restrictions of the funds. The changes are consistent with the reorganization
by making the fundamental investment restrictions more like the larger
corresponding TVP Funds. The changes also are consistent with Franklin
Templeton's goal of standardizing restrictions among all of the funds in the
Franklin Templeton group of funds. We are proposing to make changes to the
fundamental investment restrictions as shown in the chart below:
<TABLE>
<CAPTION>
VIP TEMPLETON
VIP TEMPLETON DEVELOPING VIP TEMPLETON
GLOBAL ASSET MARKETS EQUITY INTERNATIONAL
RESTRICTION ALLOCATION FUND FUND EQUITY FUND
- ----------- ----------------- ---------------- --------------
<S> <C> <C> <C>
PROPOSAL 3 -- MODIFICATION OF RESTRICTIONS
(each sub-proposal must be individually approved)
(a) Diversification ............................... X X X
(b) Borrowing ..................................... X X X
(c) Lending ....................................... X X X
(d) Underwriting .................................. X X X
(e) Concentration ................................. X X X
(f) Senior Securities ............................. X X X
(g) Real Estate and Commodities* .................. X X X
PROPOSAL 4 -- ELIMINATION OF RESTRICTIONS
(all of the following approved as a group)
Illiquid Securities** ............................. X X X
Exercising Control or Management .................. X X X
Unseasoned Companies .............................. N/A X X
Margin Securities ................................. X X X
Securities with Unlimited Liability ............... X X X
Restricted Securities ............................. N/A X X
Management Ownership of Securities ................ X X X
Compliance with Section 817(h) .................... X X X
Warrants .......................................... N/A X N/A
Unlisted Foreign Issuers .......................... N/A X N/A
</TABLE>
- ----------------
* Currently two restrictions that will be combined into one.
**There are two restrictions with respect to illiquid securities that we are
proposing to eliminate.
43
<PAGE>
Each fund is subject to certain investment restrictions that govern the
fund's investment activities. Under the 1940 Act, certain investment
restrictions are required to be "fundamental," which means that they can only
be changed by a shareholder vote.
Recently, as a result of federal law changes, certain legal and regulatory
requirements applicable to mutual funds changed. Each fund currently is subject
to fundamental investment restrictions that are either more restrictive than
required under current law regarding diversification, and borrowing and lending
by these funds. Accordingly, we are recommending the amendment to these
fundamental investment restrictions.
The proposed changes will not affect any fund's investment goal. Although
the proposed changes in fundamental investment restrictions will provide each
fund greater flexibility to respond to future investment opportunities, we do
not anticipate that the changes, individually or in the aggregate, will result
in a material change in the level of investment risk associated with investment
in the fund. We do not anticipate that the proposed changes will materially
affect the manner in which any fund is managed.
PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUNDS' FUNDAMENTAL
INVESTMENT RESTRICTIONS
(THIS PROPOSAL INVOLVES SEPARATE VOTES ON SUB-PROPOSALS 3A -- 3G)
SUB-PROPOSAL 3a: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING DIVERSIFICATION OF INVESTMENTS.
The 1940 Act prohibits a "diversified" fund from purchasing securities of
any one issuer if, at the time of purchase, as to 75% of the fund's total
assets, more than 5% of the fund's total assets would be invested in securities
of that issuer, or the fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the fund's total
assets may be invested without regard to these limitations. Under the 1940 Act,
as recently amended, these 5% and 10% limitations do not apply to securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
or to the securities of other investment companies.
While the 1940 Act excludes the securities of other investment companies
and the U.S. government and its agencies and instrumentalities, each fund's
current restriction does not include a carve out for the securities of other
investment companies. In addition, although the 1940 Act prohibits a fund from
owning or holding more than 10% of the "outstanding voting securities" of an
issuer, each fund's current restriction prohibits the fund from holding more
than 10% of "any or all classes" of the securities of an issuer. Since each
fund's restriction excludes a broader class of securities from the 10%
limitation, it is more restrictive than the 1940 Act.
WHAT EFFECT WILL THE CHANGE IN THE CURRENT INVESTMENT DIVERSIFICATION
RESTRICTION HAVE ON THE FUNDS?
Amending each fund's diversification policy would make it consistent with
the current definition of a diversified investment company under the 1940 Act,
and would provide each fund with greater investment flexibility. The proposed
restriction is similar to the current restriction. The most significant change
in the proposed restriction is that it excludes other investment companies
securities from the 5% and 10% limitations. With this exclusion, each fund
would be able to invest cash held at the end of the day in money market funds
or other short-term investments without regard to the 5% and 10% investment
limitations. Each fund, together with the other Franklin Templeton funds, has
obtained an exemptive order from the SEC (the "Cash Sweep Order") which permits
the Franklin Templeton funds to invest their uninvested cash in one or more
Franklin or Templeton money market funds. Amending each fund's current
restriction would permit each fund to take advantage of the investment
opportunities presented by the Cash Sweep Order, since the Cash Sweep Order
contemplates relief from the 1940 Act restrictions relating to the permissible
percentage investments in other investment companies.
44
<PAGE>
SUB-PROPOSAL 3b: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING BORROWING.
Investment companies must impose certain limitations on their borrowing
activities. The limitations on borrowing are generally designed to protect
shareholders and their investments by restricting a fund's ability to subject
its assets to the claims of creditors who might have a claim to the fund's
assets that would take precedence over the claims of shareholders. A fund's
borrowing restriction must be fundamental.
Federal law allows a fund to borrow from banks up to one-third of its
total assets (including the amount borrowed). In addition, a fund may borrow up
to 5% of its total assets for temporary purposes from any person. Funds
typically borrow money to meet redemptions in order to avoid forced, unplanned
sales of portfolio securities. This technique allows a fund greater flexibility
to buy and sell portfolio securities for investment or tax considerations,
rather than for cash flow considerations.
WHAT EFFECT WILL THE CHANGE IN THE CURRENT BORROWING RESTRICTION HAVE ON A FUND?
The VIP Templeton International Fund is presently limited to borrowing up
to 5% of the value of its total assets for any reason, except from banks for
temporary emergency purposes only. In addition, the current restriction does
not specifically limit the fund's overall ability to borrow up to the 33 1/3%
allowed under current law. The VIP Templeton International Fund's current
restriction also states that the fund may not borrow in excess of 5% "for
direct investment in securities." The 1940 Act limits on borrowing historically
were interpreted to prohibit mutual funds from making additional investments in
securities while borrowings exceeded 5% of total assets. However, such a 5%
limit is not required under the 1940 Act, rather it originated from informal
regulatory positions. Accordingly, under the proposed restriction, each fund
would be permitted to make additional investments, even if borrowings exceed 5%
of total assets.
The VIP Templeton Global Asset Allocation and VIP Templeton Developing
Markets Equity Funds' restriction only permit them to borrow from banks an
amount not exceeding one-third of the value of the fund's total assets
including the amount borrowed. The proposed restriction would clarify that each
fund may borrow: (1) from banks to the extent permitted by the 1940 Act or any
exemptions therefrom, and (2) from any person for temporary purposes. However,
in either case, all borrowings must not exceed 331/3% of total assets.
The proposed restriction also permits each fund to borrow cash from
affiliated investment companies. Each fund, together with other Franklin
Templeton funds, has requested an order from the SEC that would permit each
fund to borrow money from affiliated Franklin Templeton funds (the "Interfund
Borrowing and Lending Order.") As discussed in Sub-Proposal 3c, the Interfund
Borrowing and Lending Order also would permit each fund to lend money to other
Franklin Templeton funds. If the Interfund Borrowing and Lending Order is
approved, the proposed restriction would permit each fund, under certain
circumstances, to borrow money from other Franklin Templeton funds at rates
which are more favorable than those which each fund would receive if it
borrowed from banks or other lenders.
Since the proposed borrowing restriction would provide each fund with
greater borrowing flexibility, each fund may be subject to additional costs, as
well as the risks inherent to borrowing, such as reduced total return.
SUB-PROPOSAL 3c: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING LENDING.
Certain investment techniques could, under certain circumstances, be
considered to be loans. For example, if a fund invests in debt securities, such
investments might be considered to be loans from each fund to the issuer of the
debt securities. In order to ensure that a fund may invest in bonds, debentures
or other debt securities or repurchase agreements, which could technically be
characterized as the making of loans, each fund's current fundamental
restriction excludes these securities from the
45
<PAGE>
restrictions. In addition, each fund's fundamental policy explicitly permits
each fund to lend its portfolio securities. Securities lending is a practice
that has become common in the mutual fund industry and involves the temporary
loan of portfolio securities to parties who use the securities for the
settlement of securities transactions. The collateral delivered to a fund in
connection with such a transaction is then invested to provide the fund with
additional income it might not otherwise have. Securities lending involves
certain risks if the borrower fails to return the securities.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT LENDING RESTRICTION HAVE ON THE
FUNDS?
The proposed restriction would provide each fund with greater lending
flexibility. While the proposed restriction retains the carve-outs in the
existing restriction, it also would provide each fund with additional
flexibility to make loans to affiliated investment companies to the extent
permitted by the Interfund Borrowing and Lending Order. If the Interfund
Borrowing and Lending Order is approved, the proposed restriction would permit
each fund, under certain conditions, to lend cash to other Franklin Templeton
funds at rates higher than those which the fund would receive if the fund
loaned cash to banks through short term lendings such as repurchase agreements.
We anticipate that this additional flexibility to lend cash to affiliated
investment companies would provide additional investment opportunities, and
would enhance each fund's ability to respond to changes in legal, market,
industry or regulatory conditions.
SUB-PROPOSAL 3d: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING UNDERWRITING.
Under the 1940 Act, a fund's policy concerning underwriting is required to
be fundamental. Under the federal securities laws, a person or company
generally is considered an underwriter if it participates in the public
distribution of securities of other issuers, usually by purchasing the
securities from the issuer with the intention of re-selling the securities to
the public. From time to time, a mutual fund may purchase a security for
investment purposes which it later sells or redistributes to institutional
investors or others under circumstances where a fund could possibly be
considered to be an underwriter under the technical definition of underwriter
contained in the securities laws. For example, funds often purchase securities
in private securities transactions where a resale could raise a question
relating to whether or not the fund is technically acting as an underwriter.
However, recent SEC interpretations clarify that re-sales of privately placed
securities by institutional investors do not make the institutional investor an
underwriter in these circumstances. The proposed restriction encompasses these
SEC positions.
WHAT EFFECT WILL CHANGING THE CURRENT UNDERWRITING RESTRICTION HAVE ON THE
FUNDS?
The proposed restriction is substantially similar to each fund's current
restriction. As with the current restriction, the proposed restriction
specifically permits the funds to resell restricted securities in those
instances where there may be a question as to whether a fund is technically
acting as an underwriter. The proposed underwriting restriction also clarifies
that a fund may sell its own shares without being deemed an underwriter. Under
the 1940 Act, a mutual fund will not be considered an underwriter if it sells
its own shares pursuant to a written distribution plan that complies with Rule
12b-1 of the 1940 Act.
Furthermore, the new restriction would help each fund achieve the goal of
amending the language of the investment restrictions to reflect current SEC
interpretations. It is not anticipated that adoption of the proposed
restriction would involve any additional risk since it would not affect the way
each fund is currently managed.
SUB-PROPOSAL 3e: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS
REGARDING INVESTMENTS IN REAL ESTATE AND COMMODITIES.
Under the 1940 Act, a fund's restrictions regarding investments in real
estate and commodities must be fundamental. Each fund presently has two
separate investment restrictions that govern each
46
<PAGE>
fund's ability to invest in real estate and commodities. The proposed
standardized restriction would combine these two restrictions into one, as well
as clarify the types of financial commodities and other instruments in which
each fund may invest.
WHAT EFFECT WILL COMBINING AND REVISING THE REAL ESTATE AND COMMODITIES
RESTRICTIONS HAVE ON THE FUNDS?
The proposed restriction would combine the limitations on investing in
both real estate and commodities into one restriction.
REAL ESTATE: Each fund's current restriction states that the fund may not
invest in real estate, but it specifically excludes "first mortgage loans or
other direct obligations secured by real estate" from the restriction. Since an
investment in first mortgage loans or other obligations secured by real estate
would not be considered a direct investment in real estate, the proposed
restriction would continue to permit such an investment. The proposed
restriction would specifically reference each fund's ability to purchase
securities of real estate investment trusts ("REITs") to the extent that an
investment in REITs would otherwise meet each fund's investment criteria.
Investing in REITs has gained popularity since the early 1990s, and the number
of REITs available for investment has also increased dramatically.
Each fund will continue to be prohibited from directly purchasing or
selling real estate. It is not anticipated that the proposed restriction would
involve any additional risk to the funds as the funds do not currently, and
have not in the past, invested in real estate or REITs. Therefore, the proposed
restriction will not affect the way the funds are currently managed.
COMMODITIES: Generally, commodities are considered to be physical
commodities such as wheat, cotton, rice and corn. However, futures contracts,
including financial futures contracts such as those related to currencies,
stock indices or interest rates, are also considered to be commodities. Funds
typically invest in such contracts and options on contracts for hedging or
other investment purposes. The proposed restriction clarifies that each fund
has the flexibility to invest in financial futures contracts and related
options. The proposed restriction would permit investment in financial futures
instruments for either investment or hedging purposes. Although each fund has
always had the ability to invest in options on securities and options on
futures, they have not done so. Each fund does not intend to begin investing in
financial futures contracts and related options. Therefore, it is not
anticipated that the proposed restriction would involve any additional risk.
Using financial futures instruments can involve substantial risks, and will be
utilized only if the investment adviser believes such risks are advisable.
SUB-PROPOSAL 3e: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING ISSUING SENIOR SECURITIES.
Under the 1940 Act, a fund must have an investment policy describing its
ability to issue senior securities. A "senior security" is an obligation of a
fund with respect to its earnings or assets that takes precedence over the
claims of the fund's shareholders with respect to the same earnings or assets.
The 1940 Act generally prohibits an open-end fund from issuing senior
securities in order to limit the use of leverage. In general, a fund uses
leverage when it borrows money to enter into securities transactions, or
acquires an asset without being required to make payment until a later time.
SEC staff interpretations allow a fund to engage in a number of types of
transactions which might otherwise be considered to create "senior securities"
or "leverage," so long as the fund meets certain collateral requirements
designed to protect shareholders. For example, some transactions that may
create senior security concerns include short sales, certain options and
futures transactions, reverse repurchase agreements and securities transactions
that obligate the fund to pay money at a future date (such as when-issued,
forward commitment or delayed delivery transactions). When engaging in such
transactions, a fund must mark on its or its custodian bank's books to meet the
SEC Staff's
47
<PAGE>
collateralization requirements. A fund may also set aside money or securities
with its custodian bank to meet the SEC staff's collateralization requirements.
This procedure effectively eliminates a fund's ability to engage in leverage
for these types of transactions.
A number of each fund's current fundamental and non-fundamental investment
restrictions relate to senior securities. For example, each fund currently is
prohibited from purchasing securities on margin and making short sales. Each
fund was originally required by the states to have fundamental restrictions
regarding these transactions. These types of transactions also raise senior
security issues under the federal securities laws. In addition, each fund
presently has a non-fundamental policy under which it may not "pledge, mortgage
or hypothecate its assets as security for loans (except to the extent of
allowable temporary loans)." These types of transactions are generally
considered to raise senior security concerns. Adopting Sub-Proposal 3f would
consolidate into one investment restriction: (1) a concise statement of each
fund's senior security restriction, as well as (2) each fund's current
fundamental and non-fundamental restrictions that address senior security
issues. The part of each fund's current restriction relating to the purchase of
securities on margin is proposed to be eliminated in Proposal 4. The
restriction on short sales would be carved out of the new senior securities
restriction, as further described below.
WHAT EFFECT WILL AMENDING THE RESTRICTION REGARDING ISSUING SENIOR SECURITIES
HAVE ON THE FUNDS?
The proposed restriction would permit each fund to engage in permissible
types of leveraging transactions. The proposed restriction would permit a fund
to engage in options, futures contracts, forward contracts, repurchase
transactions or reverse repurchase transactions. The proposed restriction also
would permit a fund to make short sales as permitted under the 1940 Act, and
any exemptions available under the 1940 Act. Essentially, the proposed
restriction clarifies a fund's ability to engage in those investment
transactions (such as repurchase transactions) that, while appearing to raise
senior security concerns, have been interpreted as not constituting the
issuance of senior securities under the federal securities laws.
The Board does not anticipate that any additional risk to a fund will
occur if the fund combines the current fundamental restriction with the
non-fundamental restriction to result in one, standardized, fundamental
investment restriction regarding senior securities.
SUB-PROPOSAL 3g: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING CONCENTRATION OF THE FUND'S INVESTMENTS IN THE SAME
INDUSTRY.
Under the 1940 Act, a fund's policy of concentrating its investments in
securities of companies in the same industry must be fundamental. Under the
federal securities laws, a mutual fund "concentrates" its investments if it
invests more than 25% of its "net" assets (exclusive of certain items such as
cash, U.S. government securities, securities of other investment companies, and
tax-exempt securities) in a particular industry or group of industries. A fund
is not permitted to concentrate its investments in a particular industry unless
it so states.
WHAT EFFECT WILL AMENDING THE CURRENT RESTRICTION REGARDING INDUSTRY
CONCENTRATION HAVE ON THE FUNDS?
Each fund's existing fundamental restriction recites the fund's
concentration policy and states that the fund may not invest more than 25% of
its assets in any single industry. The proposed restriction provides each fund
with marginally added flexibility because, consistent with SEC interpretations,
it exempts from the 25% limitation: (i) securities of other investment
companies, and (ii) securities issued or guaranteed by the U. S. government or
any of its agencies or instrumentalities. It also recites the current federal
securities law requirement with respect to concentration that limits
investments to "net" as opposed to "total" assets. While the proposed
restriction does not address specifically the timing of the application of the
concentration policy, as the current restriction does, the parenthetical
clarifying that a fund may not "invest" more than 25% of its assets in the
securities industry is adequate to reflect that the test applies at the time of
investment. The investment flexibility provided
48
<PAGE>
by the new concentration restriction will help each fund respond to future
legal, regulatory, market or technical changes. However, adoption of the
proposed restriction is not expected to change materially the way in which each
fund currently is managed as each fund does not intend to begin concentrating
in shares of other investment companies or the U. S. government or any of its
agencies or instrumentalities.
THE BOARD OF TRUSTEES OF THE VIP TRUST UNANIMOUSLY RECOMMENDS THAT
YOU APPROVE SUB-PROPOSALS 3A--3G
PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF THE FUNDS'
FUNDAMENTAL INVESTMENT RESTRICTIONS
WHICH FUNDAMENTAL INVESTMENT RESTRICTIONS IS THE BOARD RECOMMENDING THAT THE
FUNDS ELIMINATE?
Each fund has several fundamental investment restrictions that were
originally drafted pursuant to state laws and regulations. Because of recent
changes in law and recent SEC staff positions, these laws and regulations are
no longer relevant to the fund. Thus, each fund is no longer legally required
to include some of the current restrictions among its fundamental investment
restrictions. Eliminating these investment restrictions will further the goal
of the reorganization by making the fundamental investment restrictions more
like the larger corresponding TVP Funds. In addition, it will standardize these
funds fundamental investment restrictions with others in the Franklin Templeton
group of funds. We have determined that all of these current fundamental
investment restrictions should be eliminated.
ILLIQUID AND RESTRICTED SECURITIES
Each fund has fundamental investment restrictions that limit its ability
to invest in illiquid securities and to purchase restricted securities.
Illiquid securities are securities that may not be readily sold within seven
days at the price at which they are being accounted. Similarly, restricted
securities are subject to certain contractual or other restrictions on their
resale. Restricted securities are often considered to be illiquid because their
disposition is often difficult or requires more than seven days. We recommend
that all these fundamental investment restrictions be eliminated. These
restrictions likely originated under certain state securities laws and are no
longer required by the states. The SEC does not require a fund's illiquid
securities restriction to be fundamental. In addition, there is currently no
SEC requirement that a fund state a restricted securities policy.
Under the current restrictions, each fund is prevented from investing more
than 10% of its assets in securities that are illiquid. The SEC recently
amended its position to permit funds to invest up to 15% of their assets in
illiquid securities. However, each fund may not take advantage of this new SEC
position because its existing policies relating to investments in illiquid
securities are both fundamental and contain a lower percentage limitation.
Since the current policy is fundamental, it may only be changed by a
shareholder vote. Eliminating this as a fundamental policy would enable each
fund to both take advantage of the current SEC position and to respond to
future SEC changes in this area without the delay and expense of a shareholder
vote, thereby providing each fund with additional investment flexibility.
Although each fund's policy relating to illiquid securities would no longer be
fundamental, each fund would continue to be subject to the SEC rules and
regulations in this area.
The VIP Templeton Developing Markets Equity Fund and VIP Templeton
International Equity Fund have adopted restrictions on the purchase of
restricted securities. Current SEC rules have substantially increased the
number of restricted securities that can now be considered liquid and, in
addition, have given to the trustees the ability to determine, under specific
guidelines, that a security is liquid. The most common form of liquid
restricted securities would be Rule 144A securities. Elimination of this
restriction would allow these funds greater flexibility to invest in restricted
securities.
49
<PAGE>
Elimination of these restrictions should not have an impact on the
day-to-day management of any fund as each fund does not currently intend to
increase the percentages in which each fund invests in either illiquid or
restricted securities.
FOREIGN ISSUERS
The VIP Templeton Developing Markets Equity Fund has an investment
restriction that provides that it will not invest more than 15% of its assets
in securities of foreign issuers not listed on a recognized U.S. or foreign
securities exchange, including no more than 10% in illiquid investments. The
nature of the foreign securities markets has changed considerably since this
restriction was adopted, including a greater variety of foreign securities that
are not traded on a securities exchange. Elimination of this restriction would
allow the fund greater flexibility to invest in securities that are now
commonplace in the global securities market.
Elimination of this restriction, however, should not have an impact on the
day-to-day management of the fund as it does not currently intend to increase
the percentages in which it invests in either unlisted or illiquid foreign
securities.
CONTROL OR MANAGEMENT
Each fund has adopted a current fundamental investment restriction that
limits each fund's ability to invest for purposes of exercising control or
management. This restriction was enacted in response to various state
securities laws and is no longer required. Typically, if a fund acquires a
large percentage of the securities of a single issuer, it will be deemed to
have invested in such issuer for the purposes of exercising control or
management. This restriction was intended to ensure that a mutual fund would
not make investments in order to become engaged in the business of managing
another company or to influence management.
Eliminating this restriction will not have any impact on the day-to-day
management of any fund because each fund has not in the past, and has no
present intention, of investing in an issuer for the purposes of exercising
control or management. Further, the goal of this restriction, namely to limit a
fund's ability to control another issuer, is embodied in the 1940 Act
diversification rule, which is proposed to be incorporated in the proposed
investment restriction relating to diversification (described in Sub-Proposal
3a). The diversification restriction limits each fund's ability to own more
than a certain percentage of any one issuer, which acts to limit its ability to
exercise control or management over another company.
UNSEASONED COMPANIES
Each fund, except the VIP Templeton Global Asset Allocation Fund, has
adopted a current fundamental investment restriction that limits each fund's
ability to invest in companies which have a record of less than three years of
continuous operations. Such relatively new companies are considered to be
unseasoned companies. This restriction was originally included in response to
the various state law requirements to which mutual funds were previously
subject. This restriction was intended to ensure a fund's stability through its
investment in companies with a proven track record.
Elimination of this restriction should not have an impact on the
day-to-day management of any fund as each fund has not previously, nor does it
currently intend, to invest in unseasoned companies.
SECURITIES ON MARGIN
Each fund has adopted a current fundamental investment restriction that
limits each fund's ability to purchase securities on margin or sell securities
short. This restriction was originally included in response to various state
law requirements. Each fund is no longer required by state law to retain
specific fundamental policies regarding these types of investment activities.
Each fund's ability to sell
50
<PAGE>
securities short is addressed in the proposed restriction relating to issuing
senior securities (described in Sub-Proposal 3f). Further, a fund's purchase on
margin would clearly be viewed as creating a senior security and would be
prohibited under the 1940 Act and each fund's proposed restriction as described
in Sub-Proposal 3f. Thus, there remains no reason to specifically address
purchasing securities on margin in a separate restriction.
As a general matter, elimination of this fundamental restriction relating
to purchasing securities on margin should not have an impact on the day-to-day
management of any fund, since the 1940 Act prohibitions on these types of
transactions would continue to apply to each fund.
SECURITIES WITH UNLIMITED LIABILITY
Each fund has adopted a current fundamental investment restriction that
limits each fund's ability to invest in assessable securities or securities
involving unlimited liability on the part of the fund. This restriction was
originally included to comply with various state laws. Each fund is no longer
required to include this as a fundamental policy.
Elimination of this restriction should not have an impact on the
day-to-day management of any fund as each fund has not previously, nor does it
currently intend, to invest in securities with unlimited liability.
MANAGEMENT OWNERSHIP OF SECURITIES
Each fund has a current restriction that limits each fund's ability to
invest in securities issued by companies whose securities are owned in certain
amounts by trustees and officers of the fund, or by its investment adviser.
This policy originated many years ago with a now obsolete state securities law.
As a general matter, elimination of this fundamental restriction should
not have an impact on the day-to-day management of any fund, as the 1940 Act
restrictions still apply to each fund. These restrictions generally prohibit
transactions between a fund and any affiliate or affiliates of affiliates,
which include the trustees and officers of a fund.
TAX DIVERSIFICATION FOR VARIABLE ANNUITY FUNDS
Each fund has adopted a restriction that prohibits the fund from investing
in a manner that does not comply with the investment diversification
requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended
(the Code). Section 817(h) of the Code applies to investment companies, like
each fund, which are held by segregated asset accounts of one or more insurance
companies, and which are only available to the public through the purchase of a
variable contract or under certain employee benefit plans. Under Section 817(h)
of the Code and applicable Treasury Regulations, each fund will be "adequately
diversified" for purposes of the Code, if: (i) no more than 55% of the value of
the total assets of the fund may be represented by any one investment, (ii) no
more than 70% by any two investments, (iii) no more than 80% by any three
investments, and (iv) no more than 90% by any four investments. Each fund seeks
to maintain compliance with the diversification provisions set forth in the
Code and the Treasury Regulations in order to take advantage of certain tax
opportunities available to insurance funds.
As a general matter, elimination of this fundamental restriction should
not have an impact on the day-to-day management of each fund since the
restrictions of the Code and applicable Treasury Regulations will continue to
apply to each fund, and each fund will continue to invest in a manner which
complies with the diversification rules set forth in Section 817(h) of the Code
and applicable Treasury Regulations.
WARRANTS
The VIP Templeton Developing Markets Equity Fund has an investment
restriction that prohibits it from investing more than 5% of its assets in
warrants, whether or not listed on the New York Stock
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<PAGE>
Exchange, including no more than 2% of its total assets which may be invested
in warrants that are not listed on those exchanges. Warrants acquired by the
fund in units or attached to securities are not included in this restriction.
This policy originated many years ago with now obsolete state securities law.
As a general matter, elimination of this fundamental restriction should
not have an impact on the day-to-day management of the fund. The fund has not
previously invested, nor does it currently intend to invest, in warrants in any
significant excess of these prior limitations.
WHY ARE WE RECOMMENDING THAT THE RESTRICTIONS BE ELIMINATED?
We have determined that eliminating the restrictions is consistent with
the federal securities laws. Moreover, eliminating these restrictions is
consistent with the goals of the reorganization. This will also modify each
fund's list of fundamental restrictions to standardized investment restrictions
adopted by other Franklin and Templeton funds. By both standardizing and
reducing the total number of investment restrictions that can be changed only
by a shareholder vote, we believe that each fund will be able to minimize the
costs and delays associated with holding future shareholder meetings to revise
fundamental policies that become outdated or inappropriate.
We believe that eliminating the restrictions is in the best interest of
each fund's shareholders as it will provide each fund with increased
flexibility to pursue its investment goal.
WHAT ARE THE RISKS, IF ANY, IN ELIMINATING THE RESTRICTIONS?
We do not anticipate that eliminating the restrictions will result in any
additional risk to any fund. Although each fund's current restrictions, as
drafted, are no longer legally required, each fund's ability to invest in these
areas will continue to be subject to the limitations of the 1940 Act, any
exemptive orders granted under the 1940 Act, and the Code. Further, each fund
has no current intention of changing its present investment practices as a
result of eliminating these restrictions.
THE BOARD OF TRUSTEES OF THE VIP TRUST UNANIMOUSLY RECOMMENDS
THAT YOU APPROVE PROPOSAL 4
VOTING INFORMATION AND PRINCIPAL SHAREHOLDERS
HOW ARE VOTES SOLICITED?
We intend to solicit proxies by mail. In addition, the employees of (1)
the Trusts and their affiliates and of (2) the insurance companies, may solicit
voting instructions from you in person or by telephone. The cost of soliciting
proxies and voting instructions is borne by the TVP Trust, VIP Trust and the
investment advisers to the funds. The Trusts do not reimburse their employees
and agents involved in the solicitation of proxies.
WHAT IS A QUORUM?
A majority of the shares entitled to vote--present in person or
represented by proxy--constitutes a quorum at the meeting. Shares abstaining on
any item are counted as shares present and entitled to vote for purposes of
determining the presence of a quorum.
HOW ARE VOTES COUNTED?
The inspector of election will count the total number of votes cast "for"
approval of each of the proposals for purposes of determining whether
sufficient affirmative votes have been cast. Abstentions are counted towards
quorum and will be treated as votes not cast. Approval of the proposals
requires the affirmative vote of the shareholders. Thus, abstentions have the
same effect as a negative vote.
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<PAGE>
CAN THE MEETINGS BE ADJOURNED?
If a sufficient number of votes in favor of any of the proposals contained
in the notice of special meeting is not received by the time scheduled for the
meeting, the persons named in the proxy may propose one or more adjournments of
the meeting to permit further solicitation of proxies with respect to that
proposal. Any proposed adjournment requires the affirmative vote of a majority
of shares present at the meeting.
Your insurance company will vote in favor of an adjournment those shares
which it is entitled to vote for that proposal. It will vote against an
adjournment those shares required to be voted against that proposal. Any
proposals for which sufficient favorable votes have been received by the time
of the meeting may be acted upon and considered final regardless of whether the
meeting is adjourned to permit additional solicitation with respect to any
other proposal.
HOW MANY SHARES ARE OUTSTANDING?
The number of outstanding shares for the TVP Funds on November 30, 1999
are as follows:
NAME OF TVP FUND AND CLASS SHARES ENTITLED TO VOTE
- ------------------------------------------------ ------------------------
TVP Franklin Large Cap Growth Investments Fund
Class 1 ....................................... 130,457.215 shares
Class 2 ....................................... 0 shares
TVP Franklin Small Cap Investments Fund
Class 1 ....................................... 90,107.937 shares
Class 2 ....................................... 3,822,707.194 shares
TVP Mutual Shares Investments Fund
Class 1 ....................................... 253,334.629 shares
Class 2 ....................................... 234,626.517 shares
TVP Templeton Asset Allocation Fund
Class 1 ....................................... 29,201,782.289 shares
Class 2 ....................................... 877,565.929 shares
TVP Templeton Bond Fund
Class 1 ....................................... 2,085,196.698 shares
Class 2 ....................................... 50,207.875 shares
TVP Templeton Developing Markets Fund
Class 1 ....................................... 38,212,940.945 shares
Class 2 ....................................... 5,967,864.634 shares
TVP Templeton International Fund
Class 1 ....................................... 47,530,301.564 shares
Class 2 ....................................... 3,823,924.683 shares
TVP Templeton Stock Fund
Class 1 ....................................... 26,629,092.361 shares
Class 2 ....................................... 1,954,609.117 shares
TVP Franklin S&P 500 Index Fund
Class 1 ....................................... 554,879.690 shares
Class 2 ....................................... 8,334.000 shares
Class 3 ....................................... 103,315.752 shares
TVP Franklin Strategic Income Investments Fund
Class 1 ....................................... 413,690.850 shares
Class 2 ....................................... 0 shares
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<PAGE>
The number of outstanding shares for the VIP Funds on November 30, 1999
are as follows:
NAME OF VIP FUND AND CLASS SHARES ENTITLED TO VOTE
- -------------------------------------------- ------------------------
VIP Templeton Global Asset Allocation Fund
Class 1 ................................... 5,285,559.053 shares
Class 2 ................................... 5,163.015 shares
VIP Templeton Developing Markets Equity Fund
Class 1 ................................... 18,240,236.041 shares
Class 2 ................................... 30,315.707 shares
VIP Templeton International Equity Fund
Class 1 ................................... 43,998,966.053 shares
Class 2 ................................... 150,878.592 shares
WHO ARE THE SHAREHOLDERS?
The name, address and percentage of ownership of the shareholders that
owned of record 5% or more of the TVP Funds on November 30, 1999, and the
percentage of the corresponding VIP Funds that would be owned by these
shareholders after completing the reorganization based upon their holdings on
November 30, 1999 are as follows:
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- ---------------------------------------------------- ------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Franklin Large Cap Growth Investments Fund ......... Templeton Funds Annuity Class 1 19.3 0.1
Company(1)
100 Fountain Parkway
St. Petersburg, FL
33716-1205
Franklin Large Cap Growth Investments Fund ......... Templeton American Class 1 32.5 0.2
General Life of
Bermuda
The ACE Building
30 Woodburne Avenue
P.O. Box HM 1007
Hamilton HM DX,
Bermuda
Franklin Large Cap Growth Investments .............. COVA Financial Services Class 1 48.2 0.3
Life Insurance Company(2)
One Tower Lane,
Suite 3000
Oakbrook Terrace, IL
60181-4644
Franklin Small Cap Investments Fund ................ Templeton Funds Annuity Class 1 28.4 0.1
Company
100 Fountain Parkway
St. Petersburg, FL
33716-1205
Franklin Small Cap Investments Fund ................ COVA Financial Services Class 1 69.2 0.2
Life Insurance Company
One Tower Lane,
Suite 3000
Oakbrook Terrace, IL
60181-4644
Franklin Small Cap Investments Fund ................ Pruco Life Insurance Class 2 67.5 63.3
Company(3)
213 Washington Street
Newark, NJ 07102-2992
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- --------------------------------------------- -------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Franklin Small Cap Investments Fund ......... Travelers Life & Annuity Class 2 22.4 21.0
Company/Travelers Life
Insurance Company(4)
1 Tower Square
Hartford, CT 06183
Franklin Small Cap Investments Fund ......... Pruco Life Insurance Class 2 6.1 5.7
Company of New Jersey
213 Washington Street
Newark, NJ 07102-2992
Mutual Shares Investments Fund .............. Templeton Funds Annuity Class 1 9.9 0.1
Company
100 Fountain Parkway
St. Petersburg, FL 3376-
1205
Mutual Shares Investments Fund .............. COVA Financial Services Class 1 89.3 0.5
Life Insurance Company
One Tower Lane,
Suite 3000
Oakbrook Terrace, IL
60181-4644
Mutual Shares Investments Fund .............. Phoenix Home Life Mutual Class 2 100 36.0
Insurance Company(5)
One American Row
Hartford, CT 06115
Templeton Asset Allocation Fund ............. The Variable Annuity Class 1 48.0 43.8
Life Insurance Company(6)
2929 Allen Parkway
Houston, TX 77019
Templeton Asset Allocation Fund ............. Travelers Life & Annuity Class 1 35.9 32.8
Company/Travelers Life
Insurance Company
1 Tower Square
Hartford, CT 06183
Templeton Asset Allocation Fund ............. Phoenix Home Life Mutual Class 1 15.8 14.4
Insurance Company
One American Row
Hartford, CT 06115
Templeton Asset Allocation Fund ............. Phoenix Home Life Mutual Class 2 93.8 93.5
Insurance Company
One American Row
Hartford, CT 06115
Templeton Bond Fund ......................... Travelers Life & Annuity Class 1 54.5 9.8
Company/Travelers Life
Insurance Company
1 Tower Square
Hartford, CT 06183
Templeton Bond Fund ......................... Phoenix Home Life Mutual Class 1 44.0 8.0
Insurance Company
One American Row
Hartford, CT 06115
Templeton Bond Fund ......................... Glenbrook Life and Class 2 100 61.5
Annuity Company(7)
3100 Sanders Road
Northbrook, IL 60062
Templeton Developing Markets Fund ........... IDS Life Insurance Class 1 85.5 51.9
Company(8)
IDS Tower 10
Minneapolis, MN 55440
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- ------------------------------------------- --------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Templeton Developing Markets Fund ......... IDS Life Insurance Class 1 5.7 3.5
Company of New York
20 Madison Avenue
Extension
Albany, NY 12203
Templeton Developing Markets Fund ......... Phoenix Home Life Class 2 26.9 26.7
Mutual Insurance
Company
One American Row
Hartford, CT 06115
Templeton Developing Markets Fund ......... CUNA Mutual Life Class 2 31.3 31.1
Insurance Company(9)
2000 Heritage Way
Waverly, IA 50677
Templeton Developing Markets Fund ......... Minnesota Mutual Life Class 2 24.7 24.5
Insurance Company(10)
400 Robert Street North
St. Paul, MN 55101-2098
Templeton Developing Markets Fund ......... Travelers Life & Annuity Class 2 12.7 12.6
Company/Travelers Life
Insurance Company
1 Tower Square
Hartford, CT 06183
Templeton International Fund .............. The Variable Annuity Class 1 78.1 44.4
Life Insurance Company
2929 Allen Parkway
Houston, TX 77019
Templeton International Fund .............. Phoenix Home Life Mutual Class 1 7.6 4.3
Insurance Company
One American Row
Hartford, CT 06115
Templeton International Fund .............. Jefferson Pilot Financial Class 1 6.5 3.7
Insurance Company(11)
One Granite Place
P.O. Box 515
Concord, NH 03302-0515
Templeton International Fund .............. Phoenix Home Life Mutual Class 2 37.7 36.5
Insurance Company
One American Row
Hartford, CT 06115
Templeton International Fund .............. Travelers Life & Annuity Class 2 20.2 19.5
Company/Travelers Life
Insurance Company
Tower Square
Hartford, CT 06183
Templeton International Fund .............. The Union Central Life Class 2 20.8 4.9
Insurance Company(12)
P.O. Box 40888
1876 Waycross Road
Cincinnati, OH 45240
Templeton Stock Fund ...................... Travelers Life & Annuity Class 1 65.9 31.0
Company/Travelers Life
Insurance Company
1 Tower Square
Hartford, CT 06183
Templeton Stock Fund ...................... Phoenix Home Life Class 1 31.2 14.7
Mutual Insurance
Company
One American Row
Hartford, CT 06115
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- ------------------------------------- -------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Templeton Stock Fund ................ Phoenix Home Life Class 2 81.3 74.4
Mutual Insurance
Company
One American Row
Hartford, CT 06115
Templeton Stock Fund ................ Glenbrook Life and Class 2 7.2 6.6
Annuity Company
1300 Sanders Road
Northbrook, IL 60062
Templeton Stock Fund ................ The Union Central Life Class 2 9.9 9.0
Insurance Company
P.O. Box 40888
1876 Waycross Road
Cincinnati, OH 45240
Franklin S&P 500 Index Fund ......... Allianz Life Insurance Class 1 96.5 96.5
Company of North
America1(3)
1750 Hennepin Ave.
Minneapolis, MN 55403
Franklin S&P 500 Index Fund ......... Templeton Funds Annuity Class 2 100 100
Company
100 Fountain Parkway
St. Petersburg, FL 33716-
1205
Franklin S&P 500 Index Fund ......... Templeton Funds Annuity Class 3 8.1 8.1
Company
100 Fountain Parkway
St. Petersburg, FL 33716-
1205
Franklin S&P 500 Index Fund ......... Bederson & Company LLP Class 3 6.2 6.2
c/o Jules Schneider
405 Northfield Avenue
West Orange NJ 07052
Franklin S&P 500 Index Fund ......... Bank of China Class 3 7.9 7.9
c/o Alan Wong
410 Madison Avenue
New York, NY 10017-1191
Franklin S&P 500 Index Fund ......... William H. Gordon Class 3 9.5 9.5
Associates
c/o Frank P. Homburger
4591 Daly Drive
Chantilly, VA 30253-3707
Franklin S&P 500 Index Fund ......... Gilmer Sadler Ingram ET Class 3 7.2 7.2
c/o John J. Gill
65 East Main Street
Pulaski, VA 24301
Franklin S&P 500 Index Fund ......... Hair Club for Men LTD Class 3 9.3 9.3
c/o Gaynelle Carrillo
1515 South Federal
Highway, Suite 401
Boca Raton, FL 33432
Franklin S&P 500 Index Fund ......... Anniston Medical Clinic Class 3 6.8 6.8
c/o Mike Limerick
1010 Christine Avenue
Anniston, AL 36207
Franklin S&P 500 Index Fund ......... Community Living, Inc. Class 3 8.0 8.0
c/o William Martancik
1600 Arboretum Blvd.
Victoria, MN 55386
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- ---------------------------------------------------- --------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Franklin S&P 500 Index Fund ........................ Franklin Resources, Inc. Class 3 8.1 8.1
Corporate Accounting
Attention: Michael
Corcoran
555 Airport Blvd.
4th Floor
Burlingame, CA 94010
Franklin Strategic Income Investments Fund ......... Hartford Life & Annuity(14) Class 1 16.1 16.1
200 Hopmeadow Street
Simsbury, CT 06089
Franklin Strategic Income Investments Fund ......... Hartford Life Class 1 11.3 11.3
200 Hopmeadow Street
Simsbury, CT 06089
Franklin Strategic Income Investments Fund ......... Templeton Funds Annuity Class 1 72.5 72.5
Company
100 Fountain Parkway
St. Petersburg, FL
33716-1205
</TABLE>
- ----------------
1 Templeton Funds Annuity Company is a Florida corporation and is a wholly
owned subsidiary of Franklin Resources, Inc.
2 COVA Financial Services Life Insurance Company is a Missouri corporation and
is a wholly owned subsidiary of General American Life Insurance Company.
3 Pruco Life Insurance Company is an Arizona corporation and is owned by The
Prudential Insurance Company of America.
4 Travelers Life & Annuity Company and Travelers Life Insurance Company are
Connecticut corporations and are owned by The Travelers Insurance Company,
which is an indirect wholly owned subsidiary of Citigroup Inc.
5 Pheonix Home Life Mutual Insurance Company is a New York corporation.
6 The Variable Annuity Life Insurance Company is a Texas corporation and is an
indirect wholly owned subsidiary of American General Corporation.
7 Glenbrook Life and Annuity Company is an Illinois corporation and is a
wholly owned subsidiary of Allstate Insurance Company.
8 IDS Life Insurance company is a Minnesota corporation and is a wholly owned
subsidiary of American Express Financial Corporation.
9 CUNA Mutual Life Insurance Company is an Iowa corporation.
10 Minnesota Mutual Life Insurance Company is a Minnesota corporation.
11 Jefferson Pilot Financial Insurance Company (formerly know as Chubb Life
Insurance Company of America), is a New Jersey corporation and is a wholly
owned subsidiary of Jefferson Pilot Corporation.
12 The Union Central Life Insurance Company is an Ohio corporation.
13 Allianz Life Insurance Company of North America, a Minnesota corporation,
and its New York subsidiary, Preferred Life Insurance Company of New York,
is a wholly owned subsidiary of Allianz Versicherungs-AG Holding.
14 Hartford Life Insurance Company is a Connecticut corporation.
As of November 30, 1999, the trustees and officers of TVP Trust, as a
group, owned less than 1% of the outstanding shares of each TVP Fund.
58
<PAGE>
The name, address and percentage of ownership of the shareholders that
owned of record 5% or more of the VIP Funds, on behalf of certain separate
accounts, on November 30, 1999, and the percentage that would be owned by these
shareholders after completing the reorganization based upon their holdings as
of November 30, 1999 are as follows:
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- --------------------------------------------------- ------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Franklin Large Cap Growth Securities Fund ......... Allianz Life Insurance Class 1 100 99.5
Company of North
America (Allianz Life)*,
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Franklin Large Cap Growth Securities Fund ......... Allianz Life Insurance Class 2 100 100
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Franklin Small Cap Fund ........................... Allianz Life Insurance Class 1 100 99.7
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Franklin Small Cap Fund ........................... Allianz Life Insurance Class 2 23.58 1.5
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Franklin Small Cap Fund ........................... Hartford Life & Annuity Class 2 47.84 3.0
200 Hopmeadow Street
Simsbury, CT 06089
Franklin Small Cap Fund ........................... Hartford Life Class 2 28.57 1.8
200 Hopmeadow Street
Simsbury, CT 06089
Mutual Shares Securities Fund ..................... Allianz Life Insurance Class 1 100 99.4
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Mutual Shares Securities Fund ..................... Allianz Life Insurance Class 2 19.83 12.7
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Mutual Shares Securities Fund ..................... Hartford Life & Annuity Class 2 66.15 42.3
200 Hopmeadow Street
Simsbury, CT 06089
Mutual Shares Securities Fund ..................... Hartford Life Class 2 13.98 9.0
200 Hopmeadow Street
Simsbury, CT 06089
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- -------------------------------------------------- ------------------------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
Templeton Global Asset Allocation Fund ........... Allianz Life Insurance Class 1 100 8.8
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Global Asset Allocation Fund ........... Allianz Life Insurance Class 2 100 0.3
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Global Income Securities Fund .......... Allianz Life Insurance Class 1 100 81.9
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Global Income Securities Fund .......... Allianz Life Insurance Class 2 100 38.5
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Developing Markets Equity Fund ......... Allianz Life Insurance Class 1 95.5 39.1
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Developing Markets Equity Fund ......... Allianz Life Insurance Class 2 100 0.7
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton International Equity Fund .............. Allianz Life Insurance Class 1 100 43.1
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton International Equity Fund .............. Allianz Life Insurance Class 2 100 3.1
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Global Growth Fund ..................... Allianz Life Insurance Class 1 100 52.9
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
PERCENTAGE OF OF CLASS
CLASS OF CLASS OWNED OF VIP FUND
SHARES ON RECORD OWNED ON
TVP TRUST NAME AND ADDRESS OWNED DATE CONSUMMATION
- -------------------------------------- ------------------------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Templeton Global Growth Fund ......... Allianz Life Insurance Class 2 49.53 4.2
Company of North
America (Allianz Life),
1750 Hennepin Avenue,
Minneapolis, Minnesota,
55403-219
Templeton Global Growth Fund ......... Hartford Life & Annuity Class 2 13.41 1.1
200 Hopmeadow Street
Simsbury, CT 06089
Templeton Global Growth Fund ......... Hartford Life Class 2 37.05 3.1
200 Hopmeadow Street
Simsbury, CT 06089
</TABLE>
- ----------------
* Edward J. Bonach serves as Trustee of the Trust and is Senior Vice President
and Chief Financial Officer of Allianz Life; President and Chief Executive
Officer of Canadian American Financial Corporation; and a Director of
Preferred Life Insurance Company of New York and Life USA Holding, Inc. Mr.
Bonach may not be viewed as an independent person of the VIP Trust under
the 1940 Act because of the share ownership by Allianz Life.
Your insurance company will vote on the proposed reorganization as you
instruct. Thus, your insurance company does not exercise control over the funds
solely as the record owner of the funds' shares.
As of November 30, 1999, the trustees and officers of the VIP Trust, as a
group, owned less than 1% of the outstanding shares of each of the VIP Funds.
ANNUAL MEETINGS AND SPECIAL MEETING
Neither the TVP Trust's nor the VIP Trust's Agreement and Declaration of
Trust provide for annual meetings of shareholders. Neither Trust currently
intends to hold such a meeting in the year 2000. If the reorganization is
completed, the TVP Trust will no longer have shareholders (or shareholder
meetings). Proposals included in the proxy statement for any subsequent meeting
must be received within a reasonable time before any such meeting at the VIP
Trust's offices, 777 Mariners Island Boulevard, San Mateo, California 94404. If
a shareholder submits a proposal after that time, the proposal will not appear
in the proxy statement.
THE VIP FUNDS' SERVICE PROVIDERS
WHO PROVIDES ADMINISTRATION SERVICES TO THE VIP FUNDS?
Franklin Templeton Services, Inc. (FT Services) provides certain
administration services and facilities to each fund. FT Services has direct
agreements with Templeton Global Asset Allocation Fund and Mutual Shares
Investments Fund. FT Services has subcontracts with the managers of all other
funds. FT Services is wholly owned by Franklin Resources, Inc. and is an
affiliate of the funds' managers and principal underwriter.
FT Services' administration services include preparing and maintaining
books, records, and tax and financial reports, and monitoring compliance with
regulatory requirements.
ADMINISTRATION FEES. The funds, in the case of the VIP Templeton Global
Asset Allocation Fund and Mutual Shares Securities Fund, and the investment
advisers for all other funds, pay FT Services a monthly fee for each fund equal
to an annual rate of:
61
<PAGE>
o 15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700
million;
o 0.10% of average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the fiscal year ended December 31, 1998, FT Services received either
from the funds or from the investment advisers the following amounts:
VIP FUNDS AMOUNTS
- ---------------------------------------------------------- -------------
Franklin Large Cap Growth Securities Fund ................ $ 227,544
Franklin Small Cap Fund .................................. $ 455,754
Mutual Shares Securities Fund ............................ $ 669,378
Templeton Global Asset Allocation Fund ................... $ 135,172
Templeton Global Income Securities Fund .................. $ 250,588
Templeton Developing Markets Equity Fund ................. $ 307,396
Templeton International Equity Fund ...................... $1,379,045
Templeton Global Growth Fund ............................. $1,048,256
Franklin S&P 500 Index Fund (New) ........................ None
Franklin Strategic Income Securities Fund (New) .......... None
FT Services is located at 777 Mariners Island Blvd, P.O. Box 7777, San Mateo,
CA 94403-7777.
WHO DISTRIBUTES SHARES OF THE VIP TRUST?
Franklin Templeton Distributors, Inc. (FT Distributors) acts as the
principal underwriter in the continuous public offering of the VIP Trust
shares. FT Distributors is located at 777 Mariners Island Blvd., San Mateo, CA
94404. FT Distributors pays the expenses of the distribution of fund shares,
except to the extent these expenses are borne by your insurance company. These
expenses include advertising expenses and the costs of printing sales material
and prospectuses. The VIP Trust pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other than those
necessitated by the activities of FT Distributors) and of sending prospectuses
to existing shareholders. FT Distributors may be entitled to receive payment
under the class 2 rule 12b-1 plans, as discussed below. Except for the fees
under the rule 12b-1 plans, FT Distributors receives no other compensation from
the VIP Trust for acting as underwriter. For the fiscal year ended December 31,
1998, the funds did not pay any fees pursuant to the plans.
WHO IS THE TRANSFER AGENT OF THE VIP TRUST?
Franklin Templeton Investor Services, Inc. (FT Investor Services) is the
VIP Trust's shareholder servicing agent and acts as the fund's transfer agent
and dividend-paying agent. FT Investor Services is located at 777 Mariners
Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
WHO IS THE CUSTODIAN OF THE VIP TRUST?
The Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the VIP Funds' securities and other
assets. In addition, The Chase Manhattan Bank, at its principal office at
MetroTech Center, Brooklyn, NY 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the assets of Franklin
Global Income Securities Fund, Templeton Developing Markets Equity Fund,
Templeton Global Growth Fund and Templeton Global Asset Allocation Fund. As
foreign custody manager, the bank selects and monitors foreign sub-custodian
banks, selects and evaluates non-compulsory foreign depositories, and furnishes
information relevant to the selection of compulsory depositories.
62
<PAGE>
WHO IS THE AUDITOR OF THE VIP TRUST?
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco CA 94105, is
VIP Trust's independent auditor. The auditor gives an opinion on the financial
statements included in VIP Trust's annual report to shareholders and reviews
the trust's registration statement filed with the SEC.
FINANCIAL STATEMENTS
The financial highlights and financial statements for TVP Funds for the
fiscal year or period ended December 31, 1998, are contained in TVP Trust's
annual report to shareholders and in the prospectuses and statement of
additional information for the TVP Funds dated July 1, 1999, each of which is
incorporated by reference into this document. The financial highlights and the
financial statements for the VIP Funds for the fiscal year ended December 31,
1998 are contained in VIP Trust's annual reports to shareholders and VIP
Trust's prospectuses and statement of additional information dated October 25,
1999, each of which is incorporated by reference in this document.
The audited financial highlights and financial statements of the VIP Funds
for the fiscal year ended December 31, 1998, contained in VIP Trust's annual
reports and incorporated by reference in this document, have been audited by
PricewaterhouseCoopers LLP, independent public accountants, as indicated in its
reports with respect thereto and are incorporated herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The audited financial highlights and financial statements of the TVP Funds
for the fiscal year ended December 31, 1998, contained in TVP Trust's annual
reports and incorporated by reference in this document, have been audited by
McGladrey & Pullen, LLP independent public accountants, as indicated in its
reports with respect thereto and are incorporated herein in reliance upon the
authority of said firm as experts in accounting and auditing.
Unaudited pro forma combined financial statements of the TVP Funds and VIP
Funds for the semi-annual period ended June 30, 1999 and the pro forma combined
statement of operations for the year ended December 31, 1998 are included in
the statement of additional information to this document.
* * *
THE TVP TRUST WILL FURNISH TO YOU, WITHOUT CHARGE, COPIES OF ITS DECEMBER
31, 1998 ANNUAL REPORT AND ITS JUNE 30, 1999 SEMI-ANNUAL REPORT TO ANY
PARTICIPATING INSURANCE COMPANY IN SUFFICIENT NUMBER TO PROVIDE COPIES UPON
REQUEST ADDRESSED TO: TVP FUNDS, 100 FOUNTAIN PARKWAY, ST. PETERSBURG, FLORIDA
33716-1205 OR BY TELEPHONE AT 1-800-774-5001
YOU ARE URGED TO FILL-IN, SIGN AND DATE THE ENCLOSED VOTING INSTRUCTION
FORMS AND RETURN THEM PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
NECESSARY IF MAILED IN THE UNITED STATES.
By Order of the Board of Trustees
________________________
Secretary
December 20, 1999
63
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Exhibit I Form of Agreement and Plan of Reorganization by and between Templeton Variable
Products Series Fund and Franklin Templeton Variable Insurance Products Trust
Exhibit II Form of Investment Advisory Agreement with respect to VIP Templeton Global
Asset Allocation Fund
Exhibit III Form of Investment Advisory Agreement with respect to VIP Templeton Developing
Markets Equity Fund
Exhibit IV Form of Investment Advisory Agreement with respect to VIP Templeton
International Equity Fund
Exhibit V Information about the Investment Advisers and Certain Portfolio Managers
Exhibit VI Prospectuses of the VIP Funds
</TABLE>
64
<PAGE>
EXHIBIT I
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the Agreement) is made as of
this_____ day of______________, by and between Templeton Variable Products
Series Fund (the TVP Trust), a Massachusetts Business Trust with its principal
place of business at 500 East Broward Boulevard, Broward Financial Centre, Ft.
Lauderdale, Florida 33394, for itself and on behalf of Franklin Large Cap
Growth Investments Fund, Franklin Small Cap Investments Fund, Mutual Shares
Investments Fund, Templeton Asset Allocation Fund, Templeton Bond Fund,
Templeton Developing Markets Fund, Templeton International Fund, Templeton
Stock Fund, Franklin S&P 500 Index Fund, and Franklin Strategic Income
Investments Fund (each an Acquired Fund and collectively the Acquired Funds)
and Franklin Templeton Variable Insurance Products Trust (the VIP Trust), a
Massachusetts Business Trust with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, for itself and on
behalf of the Franklin Large Cap Growth Securities Fund, Franklin Small Cap
Fund, Mutual Shares Securities Fund, Templeton Global Asset Allocation Fund,
Templeton Global Income Securities Fund, Templeton Developing Markets Equity
Fund, Templeton International Equity Fund, Templeton Global Growth Fund,
Franklin S&P 500 Index Fund, and Franklin Strategic Income Securities Fund
(each an Acquiring Fund and collectively the Acquiring Funds).
In accordance with the terms and conditions set forth in this Agreement,
the parties desire that all of the assets of each Acquired Fund be transferred
to its corresponding Acquiring Fund corresponding thereto (as set forth in
Exhibit A hereto) in exchange for shares of the specified classes of the
corresponding Acquiring Fund (the Acquiring Fund Shares) and the assumption by
each Acquiring Fund of the liabilities (as defined in paragraph 1.6) of each
corresponding Acquired Fund, and that Acquiring Fund Shares be distributed
immediately after the Closing (as defined in paragraph 3.1) by each Acquired
Fund to its shareholders of the respective share classes of the Acquired Fund
in liquidation of the Acquired Fund. The parties intend that each
Reorganization as defined herein qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the Code),
and that each of the Acquiring Funds qualify as a "party to a reorganization"
within the meaning of Section 368 (b) of the Code, with respect to such
Reorganization.
WHEREAS, the TVP Trust and the VIP Trust have agreed to a reorganization
(the Reorganization) pursuant to which the duplication of funds will be
eliminated as the funds of the TVP Trust (the TVP Funds) will become a part of
the corresponding funds of the VIP Trust (the VIP Funds);
WHEREAS, the Board of Trustees of the TVP Trust and the VIP Trust
(including a majority of the non-interested Trustees for each Trust) have
determined that the Reorganization is in the best interest of their respective
funds and their respective shareholders and that the interest of the existing
shareholders of the VIP Funds would not be diluted as a result of the
Reorganization;
WHEREAS, the purpose of the Reorganization is to combine the assets of the
TVP Funds with those of the VIP Funds in an attempt to achieve greater
operating economies;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF EACH ACQUIRED FUND TO ITS CORRESPONDING ACQUIRING
FUND IN EXCHANGE FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF CERTAIN
IDENTIFIED ACQUIRED FUND LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED
FUND
65
<PAGE>
1.1. Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, each Acquired Fund agrees
to transfer all of the Acquired Fund's assets (as set forth in paragraph 1.2)
to its corresponding Acquiring Fund and each Acquiring Fund agrees in exchange
therefor:
(i) to deliver to the Acquired Fund the full and fractional number of each
class of Acquiring Fund Shares, determined to three decimal places by dividing
the value of each of the Acquired Fund's net assets that are so conveyed and
are attributable to each class of the Acquired Fund, computed in the manner and
as of the time and date set forth in paragraph 2.1 by the net asset value of
one Acquiring Fund Share of the particular class that is to be delivered with
respect thereto computed in the manner and as of the time and date set forth in
paragraph 2.2; and
(ii) to assume the liabilities of the Acquired Fund, as set forth in
paragraph 1.6. Such transactions shall take place at the Closing provided for
in paragraph 3.1 (the Closing).
1.2. The assets of each Acquired Fund to be acquired by the corresponding
Acquiring Fund shall consist of all property, including without limitation, all
cash, securities, commodities and futures interests and dividends or interest
receivable which are owned by the Acquired Fund and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund on the date
provided in paragraph 3.1 (the Closing Date).
1.3. Delivery of the assets of each Acquired Fund to be transferred shall be
made on the Closing Date and to the Custodians (as defined in paragraph 3.2)
for the account of the corresponding Acquiring Fund, together with proper
instructions and all documents necessary to transfer such assets to the account
of the corresponding Acquiring Fund, free and clear of all liens, encumbrances,
rights, restrictions and claims, except as may be indicated in a schedule
delivered by an Acquired Fund to the Acquiring Fund immediately prior to the
Closing. All cash delivered shall be in the form of currency or immediately
available funds payable to the order of the appropriate Custodian.
1.4. Following the transfer of assets by each Acquired Fund to its
corresponding Acquiring Fund, the assumption of the Acquired Fund's liabilities
set forth in paragraph 1.6 by the Acquiring Fund, and the distribution by the
Acquired Fund of the Acquiring Fund Shares to the shareholders of the
respective classes of the Acquired Fund, the TVP Trust shall terminate the
registration of such Acquired Fund and its shares at all appropriate federal
and state agencies. Any reporting responsibility of an Acquired Fund is and
shall remain the exclusive responsibility of the Acquired Fund up to and
including the date on which the particular Acquired Fund is terminated,
dissolved and deregistered with federal and state securities or blue sky
authorities.
1.5. Immediately after the transfer of its assets, each Acquired Fund will
distribute pro rata to the Acquired Fund's shareholders of record, determined
as of immediately after the close of business on the Closing Date (the Acquired
Fund Shareholders), the Acquiring Fund Shares of the respective classes
received by the Acquired Fund pursuant to paragraph 1.1 and will completely
liquidate. Such distribution and liquidation will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund Shareholders.
Acquired Fund Shareholders will be credited with full and fractional shares of
the class that is issued by its corresponding Acquiring Fund under this
Agreement with respect to the shares of the Acquired Fund that are held by the
Acquired Fund Investor. The aggregate net asset value of Acquiring Fund Shares
to be so credited to the Acquired Fund Shareholders shall be equal to the
aggregate net asset value of the Acquired Fund shares owned by such
shareholders as of immediately after the close of business of the New York
Stock Exchange on the Valuation Date and the outstanding shares of the Acquired
Fund will simultaneously be canceled on the books of the Acquired Fund. From
and after the Closing, all of the share certificates representing interests in
the Acquired Fund will represent a number of Acquiring Fund Shares after the
Closing Date as determined in accordance with
66
<PAGE>
paragraph 2.3. An Acquiring Fund will not issue certificates representing the
Acquiring Fund Shares in connection with such exchange except upon request by
an Acquired Fund Shareholder.
1.6. Each Acquired Fund will endeavor to discharge all of its known liabilities
and obligations prior to the Closing Date. Each Acquiring Fund shall assume all
liabilities, expenses, costs, charges and reserves of its corresponding
Acquired Fund (which shall include expenses incurred in the ordinary course of
the Acquired Fund's operations, such as accounts payable relating to custodian
and transfer agency fees, legal and audit fees, and expenses of state
securities registration of the Acquired Fund's Shares) reflected on an
unaudited statement of assets and liabilities of the Acquired Fund prepared by
Franklin Templeton Services, Inc., the business manager of the Acquired Fund,
as of the Valuation Date (as defined in paragraph 2.1) in accordance with
generally accepted accounting principles consistently applied from the prior
audited period. Each Acquiring Fund shall assume only those liabilities of its
corresponding Acquired Fund reflected on that unaudited statement of assets and
liabilities and shall not assume any other liabilities.
1.7. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund and they will be issued in the manner described in the Acquiring
Fund's then-current prospectus and statement of additional information.
1.8. Any reporting responsibility of each Acquired Fund including, but not
limited to, the responsibility for any periods ending on or before the Closing
Date for filing of regulatory reports, tax returns, or other documents with the
Securities and Exchange Commission (the SEC), any state securities or any other
relevant regulatory authority, is and shall remain the responsibility of that
Acquired Fund.
1.9. At least_____ business days prior to the Closing Date, each Acquired Fund
will provide its corresponding Acquiring Fund with a schedule of its assets and
liabilities as of________, and each Acquiring Fund will provide its
corresponding Acquired Fund with a copy of its current investment objective and
policies. Each Acquired Fund reserves the right to sell any of the securities
or other assets shown on the schedule prior to the Closing Date but will not,
without the prior approval of the corresponding Acquiring Fund, acquire any
additional securities other than securities which the Acquiring Fund is
permitted to purchase in accordance with its stated investment objective and
policies. As used herein, with respect to the VIP Trust Templeton Global Asset
Allocation Fund, Templeton Developing Markets Equity Fund, and Templeton
International Equity Fund references to an Acquiring Fund's stated investment
objectives and policies shall be the stated investment objectives and policies
of their respective corresponding Acquired Fund that will be adhered to
following the Closing Date. Within_____ business days after the receipt of the
schedule of assets and liabilities from its corresponding Acquired Fund, each
Acquiring Fund will advise its corresponding Acquired Fund of any investments
shown on the schedule provided by its corresponding Acquired Fund which the
Acquiring Fund would not be permitted to hold, pursuant to its stated
investment objective and policies or otherwise. In the event that any Acquired
Fund holds any investments that its corresponding Acquiring Fund would not be
permitted to hold under its stated investment objective or policies, the
Acquired Fund, if requested by the Acquiring Fund and, to the extent
permissible and consistent with the Acquired Fund's own investment objective
and policies, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the holdings of any Acquired Fund and its
corresponding Acquiring Fund, when aggregated, would contain investments
exceeding certain percentage limitations to which the corresponding Acquiring
Fund is or will be subject with respect to such investments, the Acquired Fund,
if requested by the corresponding Acquiring Fund and, to the extent permissible
and consistent with the Acquired Fund's own investment objective and policies,
will dispose of and/or reinvest a sufficient amount of such investments as may
be necessary.
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2. VALUATION
2.1 The value of each Acquired Fund's assets to be acquired by its
corresponding Acquiring Fund hereunder shall be the value of such assets
computed as of the normal close of business of the New York Stock Exchange on
the Closing Date (the Valuation Date), using the valuation procedures set forth
in the TVP Trust's Declaration of Trust and then-current prospectus or
statement of additional information.
2.2 The net asset value of each of Acquiring Fund Share of the particular class
to be delivered with respect to the class of shares held by an Acquired Fund
Shareholder shall be the net asset value per share computed as of immediately
after the close of business of the New York Stock Exchange on the Valuation
Date, using the valuation procedures set forth in the VIP Trust's Declaration
of Trust and then-current prospectus or statement of additional information.
2.3. The number of each Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for its corresponding Acquired Fund's
assets shall be determined by dividing the value of the net assets of its
corresponding Acquired Fund that are so conveyed and are attributable to each
class of the Acquired Fund determined using the same valuation procedures
referred to in paragraph 2.1 by the net asset value of an Acquiring Fund Share
of the particular class that is to be delivered with respect thereto determined
in accordance with paragraph 2.2.
2.4. All computations of value with respect to the Acquiring Fund shall be
made by Franklin Templeton Services, Inc..
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be April 30, 2000 or such later date as the parties
may agree in writing. All acts taking place at the Closing shall be deemed to
take place simultaneously as of immediately after the close of business on the
Closing Date, unless otherwise agreed to by the parties. The close of business
on the Closing Date shall be as of___________. The Closing shall be held at
____________________ or at such other place and time as the parties shall
mutually agree.
3.2. The Bank of New York, Mutual Funds Division as custodian for the VIP Funds
and The Chase Manhattan Bank, N.A., as custodian for Templeton Global Asset
Allocation Fund, Templeton Developing Markets Equity Fund, Templeton
International Equity Fund, and Templeton Global Growth Fund, and as custodian
(collectively the Custodians), shall be instructed to deliver at the Closing a
certificate of an authorized officer stating that: (a) each Acquired Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the corresponding Acquiring Fund; and (b) all necessary taxes
including without limitation all applicable federal and state stock transfer
stamps, if any, shall have been paid, or provision for payment shall have been
made, in conjunction with the delivery of portfolio securities.
3.3. Franklin/Templeton Investor Services, Inc. (the Transfer Agent), on behalf
of the Acquired Funds, shall deliver at the Closing a certificate of an
authorized officer stating that its records contain the names and addresses of
the Acquired Fund Shareholders and the number and percentage ownership of
outstanding shares by class owned by each such shareholder immediately prior to
the Closing. Each Acquiring Fund shall deliver a certificate evidencing that
the Acquiring Fund Shares to be credited on the Closing Date to its
corresponding Acquired Fund or provide evidence satisfactory to the each
Acquired Fund that such Acquiring Fund Shares have been credited to each
Acquired Fund's account on the books of each Acquiring Fund. At the Closing,
each party shall deliver to the other such bills of sale, checks, assignments,
share certificates, if any, receipts or other documents as such other party or
its counsel may reasonably request.
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3.4. If on the Valuation Date (a) the primary trading market for portfolio
securities of an Acquiring Fund or the applicable Acquired Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading shall be disrupted so that accurate appraisal of the value
of the net assets of the Acquiring Funds or the Acquired Funds is
impracticable, the Closing Date shall be postponed with respect to the affected
Acquired Funds until the first business day after the day when trading shall
have been fully resumed and reporting shall have been restored, or such other
time as the parties may mutually agree.
3.5. With respect to each Acquired Fund, the TVP Trust shall provide the VIP
Trust and its Transfer Agent with immediate access from and after the Closing
Date to (a) the computer, electronic or such other forms of records containing
the names, addresses and taxpayer identification numbers of each Acquired
Fund's shareholders and the number and percentage ownership of each outstanding
Acquired Fund shares owned by such person, all as of the Valuation Date, and
(b) all original documentation (including all applicable Internal Revenue
Service forms, certificates, certifications and correspondence) relating to
each investor's taxpayer identification number and their liability for or
exemption from back-up withholding. Each corresponding Acquiring Fund shall
issue and deliver to the Secretary or Assistant Secretary of the TVP Funds,
acting on behalf of the Acquired Funds, a confirmation evidencing the Acquiring
Fund Shares credited on the Closing Date or shall provide evidence satisfactory
to each Acquired Fund that such Acquiring Fund Shares have been credited to
each Acquired Fund's account on the books of each Acquiring Fund. At the
Closing, each party shall deliver to the other such bills of sale, checks,
assignments, assumptions of liability share certificates, if any, receipts or
other documents of transfer, assignment or conveyance as such other party or
its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. The TVP Trust, on behalf of each Acquired Fund, represents and warrants to
the VIP Trust that for each taxable year of operation since inception
(including the taxable year ending on the Closing Date) each Acquired Fund has
met the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such and has met
the diversification requirements under Section 817(h) of the Code and the rules
thereunder.
4.2. The VIP Trust, on behalf of each Acquiring Fund, represents and warrants
to the TVP Trust that for each taxable year of its operation, each Acquiring
Fund has met the requirements of Subchapter M of the Code for qualification as
a regulated investment company and has elected to be treated as such and has
met the diversification requirements under Section 817(h) of the Code and the
rules thereunder.
5. CONVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1. The Acquiring Funds and the Acquired Funds will operate their business in
the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions, and any other
distributions that may be advisable.
5.2. The Acquired Funds covenant that the Acquiring Fund Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
5.3. Subject to the provisions of this Agreement, the TVP Trust and the VIP
Trust will each take, or cause to be taken, all action, and do or cause to be
done, all things reasonably necessary, proper, or advisable to consummate and
make effective the transactions contemplated by this Agreement.
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5.4. As promptly as practicable, but in any case within_______ days after the
Closing Date, the TVP Trust, on behalf of each Acquired Fund, shall furnish its
corresponding Acquiring Fund, in such form as is reasonably satisfactory to VIP
Trust, a statement of the earnings and profits of each Acquired Fund for
federal income tax purposes which will be carried over to the applicable
Acquiring Fund as a result of Section 381 of the Code and which will be
certified by an authorizer officer of the TVP Trust.
5.5. On the Closing Date, the TVP Trust, on behalf of each Acquired Fund, shall
furnish to its corresponding Acquiring Fund, a final statement of the total
amount of fund assets and stated liabilities of each Acquired Fund as of the
Closing Date, which statement shall be certified by an officer of the TVP Trust
as being determined in accordance with generally accepted accounting principles
consistently applied.
5.6. As promptly as practicable after the date hereof, the TVP Trust will call
a meeting of each Acquired Fund's shareholders to consider and act upon this
Agreement and to take all other action necessary and appropriate to obtain
approval of the transactions contemplated herein. The VIP Trust shall prepare
and file with the SEC a Registration Statement on Form N-14 complying in all
material respects with the requirements of the Securities Act of 1933, as
amended (the 1933 Act), the Securities Exchange Act of 1934, as amended, the
Investment Company Act of 1940, as amended, and applicable rules and
regulations thereunder (the Registration Statement), relating to such meeting
of the shareholders of each Acquired Fund. The VIP Trust shall take all
necessary and reasonable actions to have such Registration Statement declared
effective by the SEC. The TVP Trust agrees to provide all information relating
to each Acquired Fund which the VIP Trust deems necessary, proper or advisable
in the preparation of the Registration Statement or consummation of the
transactions contemplated herein.
5.7. Prior to the Closing, each Acquired Fund shall have declared a dividend
or dividends which, together with all previous such dividends, shall have the
effect of distributing to its shareholders all of its investment company
taxable income for its taxable year ended_______________ and the short taxable
year beginning_______________ and ending on the Closing Date (computed without
regard to any deduction for dividends paid), and all of its net capital gain
realized in its taxable year beginning on______________ and ending on the
Closing Date (after reduction for any capital loss carryover.)
5.8. As soon after the Closing Date as is reasonably practicable, the TVP
Trust, on behalf of each Acquired Fund shall (i) prepare and file all federal
and other tax returns and reports of each Acquired Fund required by law to be
filed with respect to all period ending on or before the Closing Date but not
previously filed, and (ii) pay all federal and other taxes shown as due and/or
all federal and other taxes that were unpaid as of the Closing Date.
6. CONDITIONS PRECEDENT
Each party's obligations hereunder shall be subject to (1) performance by the
other party of all the obligations to be performed hereunder at or before the
Closing Date, (2) all representations and warranties of the other party
contained herein being true and correct in all material respects as of the date
hereof, and, except as they may be affected by the transactions contemplated
hereby, as of the Closing Date, with the same force and effect as if made at
and as of the Closing Date, and (3) the following further conditions that, at
or before the Closing Date:
6.1. The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of each
Acquired Fund in accordance with the provisions of the TVP Trust's Declaration
of Trust and Bylaws and certified copies of the resolutions evidencing such
approval shall have been delivered to the corresponding Acquiring Fund;
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6.2. On the Closing Date, no action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein;
6.3. All consents of other parties and all other consents, orders and permits
of Federal, state, and local regulatory authorities deemed necessary by the
Acquiring Funds or the Acquired Funds to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Funds or the Acquired Funds, provided that either party hereto may
for itself waive any of such conditions;
6.4. The VIP Trust's registration statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act; and
6.5 The TVP Trust shall have received on the Closing Date the opinion of________
in a form reasonably satisfactory to the TVP Trust, and dated as of the Closing
Date, to the effect that: (a) the VIP Trust has been duly formed and is validly
existing and in good standing under the laws of the Commonwealth of
Massachusetts; and (b) the Agreement has been duly authorized, executed and
delivered by the VIP Trust on behalf of each Acquiring Fund and constitutes a
valid and legally binding obligation of each Acquiring Fund; and (c) the
Agreement is enforceable against the VIP Trust in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
6.6. The VIP Trust shall have received on the Closing Date the opinion of_______
in a form reasonably satisfactory to the VIP Trust, dated as of the Closing
Date, to the effect that: (a) the TVP Trust has been duly formed and is in good
standing under the laws of the Commonwealth of Massachusetts; (b) the Agreement
has been duly authorized, executed and delivered by the TVP Trust, on behalf of
each Acquired Fund, and constitutes a valid and legally binding obligation of
each Acquired Fund; and (c) the Agreement is enforceable against each Acquired
Fund in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
6.7. The parties shall have received the opinion of Jorden, Burt, Boros,
Cicchetti, Berenson & Johnson LLP addressed to the TVP Trust and the VIP as to
the federal income tax consequences of the Reorganization (the Tax Opinion). In
rendering the Tax Opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made
in this Agreement and each Fund's separate covenants. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance
with this Agreement, for federal income tax purposes:
6.7.1 The transfer of all or substantially all of the Acquired Funds'
assets in exchange for shares of the applicable Acquiring Funds and the
distribution of such shares to the shareholders of the Acquired Funds in
liquidation of the Acquired Funds a "reorganization" within the meaning of
Section 368(a)(1) of the Code;
6.7.2. No gain or loss will be recognized by an Acquiring Fund upon the
receipt of the assets of the applicable Acquired Fund solely in exchange or
the Acquiring Fund Shares
6.7.3. No gain or loss will be recognized by an Acquired Fund upon the
transfer of the applicable Acquired Fund assets to the Acquiring Fund in
exchange for the Acquiring Fund Shares or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Acquired Fund
shareholders in exchange for their shares of the Acquired Fund
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6.7.4. No gain or loss will be recognized by the Acquired Fund shareholders
upon the exchange of their Acquired Fund shares for the applicable
Acquiring Fund Shares;
6.7.5. The tax basis of each Acquired Fund's assets acquired by the
applicable Acquiring Fund will be the same as the tax basis of such assets
to the Acquired Fund immediately prior to the Reorganization
6.7.6. The tax basis of the Acquiring Fund Shares received by each of the
Acquired Fund shareholders pursuant to the Reorganization will be the same
as the tax basis of the Acquired Fund shares held by such shareholder
immediately prior to the Reorganization
6.7.7. The holding period of the assets of each Acquired Fund in the hands
of the applicable Acquiring Fund will include the period during which those
assets were held by the Acquired Fund; and
6.7.8. The holding period of the Acquiring Fund Shares to be received by
each Acquired Fund's shareholders will include the period during which the
Acquired Fund shares exchanged therefor were held by such shareholder
(provided the Acquired Fund shares were held as capital assets on the date
of the Reorganization).
7. BROKERAGE FEES AND EXPENSES
7.1. Each Acquiring Fund and each Acquired Fund represents and warrants to the
other that it has no obligations to pay any brokers or finders fees in
connection with the transactions provided for herein.
7.2. Each party to this Agreement shall bear or cause to be borne by an
appropriate affiliate its own expenses in connection with carrying out the
terms of this Agreement.
8. TERMINATION
8.1. This Agreement may be terminated by the mutual agreement of the VIP Trust
and the TVP Trust. In addition, this Agreement may be terminated as follows at
or prior to the Closing Date:
(a) This Agreement may be terminated as to any Acquired Fund by resolution of
the Board of Trustees of that Acquired Fund if, in good faith opinion of such
Board, proceeding with the Agreement is not in the best interests of the
Acquired Fund or its shareholders; or
(b) This Agreement may be terminated as to any Acquiring Fund by resolution of
the Board of Trustees of that Acquiring Fund if, in the good faith opinion of
such Board, proceeding with the Agreement is not in the best interests of that
Acquiring Fund or its shareholders.
The termination of a Reorganization between an Acquired Fund and its
corresponding Acquiring Fund, shall not affect the consummation or validity of
a Reorganization with respect to any other corresponding funds, and the
provisions of this Agreement shall be construed to effect this intent,
including, without limitation, as the context requires, construing the terms
"Acquiring Fund" and "Acquired Fund" as meaning only those TVP Funds and VIP
Funds, respectively, which are involved in a Reorganization as of a Closing
Date.
8.2. If this Agreement is terminated and the transactions contemplated hereby
are abandoned, this Agreement shall become void and have no effect, without any
liability on the part of any party hereto.
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9. AMENDMENTS
9.1. This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the TVP
Trust and the VIP Trust; provided, however, that following the meeting of the
Acquired Funds' Shareholders, no such amendment may have the effect of changing
the provisions for determining the number of shares of each Acquiring Fund
shares to be issued to the shareholders of the corresponding Acquired Fund
under this Agreement to the detriment of such shareholders without their
further approval.
10. ENTIRE AGREEMENT
10.1. This Agreement constitutes the entire agreement between the parties and
supersedes any prior or contemporaneous understanding or arrangement with
respect to the subject matter hereof.
11. SURVIVAL OF WARRANTIES
11.1. The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated herein.
12. LIABILITY AND INDEMNIFICATION
12.1. The parties acknowledge that the TVP Trust and the VIP Trust are business
trusts, as defined by Massachusetts law. Notice is hereby given that this
Agreement is executed on behalf of each Fund's trustees solely in their
capacity as trustees, and not individually, and that each Fund's obligations
under this Agreement are not binding on or enforceable against any of its
trustees, officers, or shareholders, but are only binding on and enforceable
against the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees, officers or trustees.
12.2. The Acquiring Funds agree to indemnify and hold harmless each trustee of
the Acquired Fund at the time of the execution of this Agreement, whether or
not such person is or becomes a trustee of the Acquiring Funds subsequent to
the Reorganization, against expenses, including reasonable attorney's fees,
judgments, fines and amount paid in settlement, actually and reasonably
incurred by such trustee in connection with any claim that is asserted against
such trustee arising out of such person's service as a trustee of the Acquired
Funds, provided that such indemnification shall be limited to the full extent
of indemnification that is available to the trustees of the Acquiring Funds
pursuant to the provisions of applicable law.
12.3. For a period beginning at the time of the Reorganization and ending not
less than_______ years thereafter, the Acquiring Funds shall provide for a
liability policy covering the actions of each trustee of the Acquired Funds at
the time of the execution of this Agreement for the period they served as such,
which may be accomplished by causing such persons to be added as insured under
the liability policy of the Acquiring Funds.
12.4. No Acquired Fund shall have any liability for the obligations of any
other Acquired Fund hereunder and no Acquiring Fund shall have any liability
for the obligation of any other Acquiring Fund hereunder.
13. WAIVER
13.1. At any time prior to the Closing Date, any of the foregoing conditions
may be waived by the Trustees of the VIP Trust or those of the TVP Trust if, in
the judgment of both Boards of Trustees,
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such waiver will not alter the shares to be received by shareholders of the
Acquired Funds or otherwise have a material adverse effect on the benefits
intended under this Agreement to the shareholders of the Acquiring Funds or the
Acquired Funds, as the case may be.
14. NOTICES
14.1. Any notice, report, statement or demand required or permitted by any
provision of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy, certified mail or overnight express courier addressed to:
For TVP Funds, on behalf of itself or each Acquired Fund:
_________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________
For VIP Funds, on behalf of itself or each Acquiring Fund:
_________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________
15. MISCELLANEOUS
15.1. The headings contained herein are for reference purposes only and shall
note affect in any way the meaning or interpretation or this Agreement.
15.2. Whenever the terms "hereto", "hereunder", "herein" or "hereof" are used
in this Agreement, they shall be construed as referring to this entire
Agreement.
15.3. This Agreement may be executed by any number of counterparts, each of
which shall be deemed an original.
15.4. This Agreement shall be governed by and construed in accordance with the
laws of the state of Massachusetts, without giving effect to the conflict of
laws principles otherwise applicable therein.
15.5. Nothing expressed or implied herein is intended or shall be construed to
confer upon or give any person, firm, trust or corporation other than the
parties and their respective successors and assigns any rights or remedies
under or by reason of this Agreement.
15.6. Any announcement or similar publicity with respect to this Agreement or
the transactions contemplated herein shall be made only at such time and in
such manner as the parties shall agree, provided that nothing herein shall
prevent either party upon notice to the other party from making such public
announcements as such party's counsel may consider advisable in order to
satisfy the party's legal and contractual obligations in such regard.
15.7. Subject to the conditions set forth in this Agreement, the failure of one
Acquired Fund to consummate the transactions contemplated hereby shall not
affect the consummation or validity of the
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Reorganization with respect to any other Acquired Fund, and the provisions of
this Agreement shall be construed to effect this intent, including, without
limitation, as the context requires, construing the terms "Acquiring Funds" and
"Acquired Funds" to mean only those series of VIP Funds and TVP Funds,
respectively, which are involved in the Reorganization as of the Closing Date.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Templeton Variable Products Series Fund on behalf of:
Franklin Large Cap Growth Investments
Fund
Franklin Small Cap Investments Fund
Mutual Shares Investments Fund
Templeton Asset Allocation Fund
Templeton Bond Fund
Templeton Developing Markets Fund
Templeton International Fund
Templeton Stock Fund
Franklin S&P 500 Index Fund
Franklin Strategic Income Investments
Fund
By: ______________________________________
Franklin Templeton Variable Insurance Products Trust on behalf of:
Franklin Large Cap Growth Securities
Fund
Franklin Small Cap Fund
Mutual Shares Securities Fund
Templeton Global Asset Allocation Fund
Templeton Global Income Securities Fund
Templeton Developing Markets Equity
Fund
Templeton International Equity Fund
Templeton Global Growth Fund
Franklin S&P 500 Index Fund
Franklin Strategic Income Securities
Fund
By: ______________________________________
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EXHIBIT II
INVESTMENT ADVISORY AGREEMENT
AGREEMENT DATED AS OF THE___ DAY OF____________ , 2000, BETWEEN FRANKLIN
TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, A MASSACHUSETTS BUSINESS TRUST
(THE TRUST), ON BEHALF OF TEMPLETON GLOBAL ASSET ALLOCATION FUND, A SERIES OF
THE TRUST (THE FUND), AND TEMPLETON INVESTMENT COUNSEL, INC., A FLORIDA
CORPORATION (THE ADVISER).
In consideration of the mutual agreements herein made, the Trust and the
Adviser understand and agree as follows:
(1) The Adviser agrees, during the life of this Agreement, to manage the
investment and reinvestment of the Fund's assets consistent with the provisions
of the Declaration of Trust of the Trust and the investment policies adopted
and declared by the Trust's Board of Trustees. 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 all such steps as may be necessary to implement those determinations.
(2) The Adviser is not required to furnish any personnel, overhead items
or facilities for the Fund, including trading desk facilities or daily pricing
of the Fund's portfolio.
(3) The Adviser shall be responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as brokers) for the execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
A. Purchase and sale orders will usually be placed with brokers which are
selected by the Adviser as able to achieve "best execution" of such orders.
"Best execution" shall mean prompt and reliable execution at the most favorable
security price, taking into account the other provisions hereinafter set forth.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Adviser in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Adviser shall take
into account its past experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign securities held by
the Fund.
C. The Adviser is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the 1934 Act), for the
Fund and/or other accounts, if any, for which the Adviser exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to
transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the Trust
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Adviser will not be required to place or
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attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith,
the Adviser shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Trust's brokerage policy; that the
research services provide lawful and appropriate assistance to the Adviser in
the performance of its investment decision-making responsibilities; and that
the commissions paid were within a reasonable range. Whether commissions were
within a reasonable range shall be based on any available information as to the
level of commission known to be charged by other brokers on comparable
transactions, but there shall be taken into account the Trust's policies that
(i) obtaining a low commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is more beneficial to
the Fund to obtain a favorable price than to pay the lowest commission; and
(ii) the quality, comprehensiveness and frequency of research studies that are
provided for the Adviser are useful to the Adviser in performing its advisory
services under this Agreement. Research services provided by brokers to the
Adviser are considered to be in addition to, and not in lieu of, services
required to be performed by the Adviser under this Agreement. Research
furnished by brokers through which the Fund effects securities transactions may
be used by the Adviser for any of its accounts, and not all research may be
used by the Adviser for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage commission
rates, account may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary market
makers acting as principal, except where, in the judgment of the Adviser,
better prices and execution may be obtained on a commission basis or from other
sources.
E. Sales of the Fund's shares (which shall be deemed to include also
shares of other registered investment companies which have either the same
adviser or an investment adviser affiliated with the Adviser) by a broker are
one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall furnish best
execution, as defined in subparagraph A above, and that such allocation shall
be within the scope of the Trust's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund shares is
taken into account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus research services, without
taking account of or placing any value upon such sale of the Fund's shares.
(4) In addition to the investment management services provided pursuant to
paragraph (1) above, the Adviser agrees, during the life of this Agreement, to
furnish or provide for the Fund, at the Adviser's expenses, such administrative
services as are required to facilitate investment in the shares of the Fund by
an insurance company, on behalf of one or more of its separate accounts,
pursuant to a fund participation agreement among the Fund, Franklin Templeton
Distributors, Inc. and such insurance company. Such services may include, but
are not limited to, the following: maintaining books and records required by
applicable state or federal laws; assisting in processing purchase and
redemption transactions; transmitting to the Fund periodic reports necessary to
enable the Fund to comply with applicable laws; processing Fund distributions;
answering questions and handling correspondence from contractowners about their
accounts; providing information about the Fund; acting as sole shareholder of
record and nominee for shareholders; and similar administrative, recordkeeping,
and contractowner services.
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(5) The Fund agrees to pay to the Adviser a monthly fee in dollars based
on a percentage of the Fund's average daily net assets, payable at the end of
each calendar month. This fee shall be calculated daily at the following annual
rates:
0.65% of the value of the Fund's net assets up to an including
$200 million;
0.585% of the value of the Fund's net assets over $200 million up
to and including $1.3 billion;
0.52% of the value of the Fund's net assets over $1.3 billion.
The Adviser may waive in advance all or a portion of its fee provided for
hereunder and such waiver will 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 fully set forth herein.
Notwithstanding the foregoing, if the total expenses of the Fund (including the
fee to the Adviser) in any fiscal year of the Trust exceed any expense
limitation imposed by applicable State law, the Adviser shall reimburse the
Fund for such excess in the manner and to the extent required by applicable
State law. The term total expenses, as used in this paragraph, does not include
interest, taxes, litigation expenses, distribution expenses, brokerage
commissions or other costs of acquiring or disposing of any of the Fund's
portfolio securities or any costs or expenses incurred or arising other than in
the ordinary and necessary course of the Fund's business. When the accrued
amount of such expenses exceeds this limit, the monthly payment of the
Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Trust's fiscal year if
accrued expenses thereafter fall below the limit.
(6) This Agreement shall become effective on May 1, 2000 and shall
continue in effect until April 30, 2002. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or interested persons (as defined in Investment
Company Act of 1940 (the 1940 Act)) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote
of (a) a majority of the outstanding voting securities of the Fund, as defined
in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Adviser no longer
acts as Adviser to the Fund, the Adviser reserves the right to withdraw from
the Fund the use of the name Templeton or any name misleadingly implying a
continuing relationship between the Fund and the Adviser or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither the
Adviser nor its officers, directors, employees or agents shall be subject to
any liability for any error of judgment, mistake of law, or any loss arising
out of any investment or other act or omission in the performance by the
Adviser of its duties under the Agreement or for any loss or damage resulting
from the imposition by any government of exchange control restrictions which
might affect the liquidity of the Trust's assets, or from acts or omissions of
custodians, or securities depositories, or from any war or political act of
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any foreign government to which such assets might be exposed, or failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross on the Adviser's part or by reason of disregard of the Adviser's duties
under this Agreement. It is hereby understood and acknowledged by the Trust
that the value of the investments made for the Fund may increase as well as
decrease and are not guaranteed by the Adviser. It is further understood and
acknowledged by the Trust that investment decisions made on behalf of the Fund
by the Adviser are subject to a variety of factors which may affect the values
and income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Adviser will not always be profitable or prove
to have been correct.
(11) It is understood that the services of Adviser are not deemed to be
exclusive, and nothing in this Agreement shall prevent the Adviser, or any
affiliate thereof, from providing similar services to other investment
companies and other clients, including clients which may invest in the same
types of securities as the Fund, or, in providing such services, from using
information furnished by others. When the Adviser determines to buy or sell the
same security for the Fund that the Adviser or one or more of its affiliates
has selected for clients of the Adviser or its affiliates, the orders for all
such security transactions shall be placed for execution by methods determined
by the Adviser, with approval by the Trust's Board of Trustees, to be impartial
and fair.
(12) This Agreement shall be construed in accordance with the laws of
State of Florida, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Adviser an
agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders of
shares of the Fund nor any Trustee, officer, agent or employee of the Trust
shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
on behalf of Templeton Global
Allocation Fund
BY:_______________________________
TEMPLETON INVESTMENT COUNSEL, INC.
By:_______________________________
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EXHIBIT III
INVESTMENT ADVISORY AGREEMENT
AGREEMENT DATED AS OF THE____DAY OF_____, 2000, BETWEEN FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, A MASSACHUSETTS BUSINESS TRUST (THE TRUST),
ON BEHALF OF TEMPLETON DEVELOPING MARKETS EQUITY FUND, A SERIES OF THE TRUST
(THE FUND), AND TEMPLETON ASSET MANAGEMENT LTD., A COMPANY ORGANIZED UNDER THE
LAWS OF SINGAPORE (THE ADVISER).
In consideration of the mutual agreements herein made, the Trust and the
Adviser understand and agree as follows:
(1) The Adviser agrees, during the life of this Agreement, to manage the
investment and reinvestment of the Fund's assets consistent with the provisions
of the Declaration of Trust of the Trust and the investment policies adopted
and declared by the Trust's Board of Trustees. 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 all such steps as may be necessary to implement those determinations. It
is understood that all acts of the Adviser in performing this Agreement are
performed by it outside the United States.
(2) The Adviser is not required to furnish any personnel, overhead items
or facilities for the Fund, including trading desk facilities or daily pricing
of the Fund's portfolio.
(3) The Adviser shall be responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as brokers) for the execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
A. Purchase and sale orders will usually be placed with brokers which are
selected by the Adviser as able to achieve best execution of such orders. Best
execution shall mean prompt and reliable execution at the most favorable
security price, taking into account the other provisions hereinafter set forth.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Adviser in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Adviser shall take
into account its past experience as to brokers qualified to achieve best
execution, including brokers who specialize in any foreign securities held by
the Fund.
C. The Adviser is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the 1934 Act), for the
Fund and/or other accounts, if any, for which the Adviser exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to
transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
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commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the Trust
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Adviser will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith,
the Adviser shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Trust's brokerage policy; that the
research services provide lawful and appropriate assistance to the Adviser in
the performance of its investment decision-making responsibilities; and that
the commissions paid were within a reasonable range. Whether commissions were
within a reasonable range shall be based on any available information as to the
level of commission known to be charged by other brokers on comparable
transactions, but there shall be taken into account the Trust's policies that
(i) obtaining a low commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is more beneficial to
the Fund to obtain a favorable price than to pay the lowest commission; and
(ii) the quality, comprehensiveness and frequency of research studies that are
provided for the Adviser are useful to the Adviser in performing its advisory
services under this Agreement. Research services provided by brokers to the
Adviser are considered to be in addition to, and not in lieu of, services
required to be performed by the Adviser under this Agreement. Research
furnished by brokers through which the Fund effects securities transactions may
be used by the Adviser for any of its accounts, and not all research may be
used by the Adviser for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage commission
rates, account may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary market
makers acting as principal, except where, in the judgment of the Adviser,
better prices and execution may be obtained on a commission basis or from other
sources.
E. Sales of the Fund's shares (which shall be deemed to include also
shares of other registered investment companies which have either the same
adviser or an investment adviser affiliated with the Adviser) by a broker are
one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall furnish best
execution, as defined in subparagraph A above, and that such allocation shall
be within the scope of the Trust's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund shares is
taken into account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus research services, without
taking account of or placing any value upon such sale of the Fund's shares.
(4) In addition to the investment management services provided pursuant to
paragraph (1) above, the Adviser agrees, during the life of this Agreement, to
furnish or provide for the Fund, at the Adviser's expenses, such administrative
services as are required to facilitate investment in the shares of the Fund by
an insurance company, on behalf of one or more of its separate accounts,
pursuant to a fund participation agreement among the Fund, Franklin Templeton
Distributors, Inc. and such insurance company. Such services may include, but
are not limited to, the following: maintaining books and records required by
applicable state or federal laws; assisting in processing purchase and
redemption transactions; transmitting to the Fund periodic reports necessary to
enable the Fund to comply with applicable laws; processing Fund distributions;
answering questions and handling correspondence from contractowners about their
accounts; providing information about the Fund; acting as sole shareholder of
record and nominee for shareholders; and similar administrative, recordkeeping,
and contractowner services.
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(5) The Fund agrees to pay to the Adviser a monthly fee in dollars at an
annual rate of 1.25% of the Fund's average daily net assets payable at the end
of each calendar month. The Adviser may waive in advance all or a portion of
its fee provided for hereunder and such waiver will 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 fully
set forth herein. Notwithstanding the foregoing, if the total expenses of the
Fund (including the fee to the Adviser) in any fiscal year of the Trust exceed
any expense limitation imposed by applicable State law, the Adviser shall
reimburse the Fund for such excess in the manner and to the extent required by
applicable State law. The term total expenses, as used in this paragraph, does
not include interest, taxes, litigation expenses, distribution expenses,
brokerage commissions or other costs of acquiring or disposing of any of the
Fund's portfolio securities or any costs or expenses incurred or arising other
than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Trust's fiscal year if
accrued expenses thereafter fall below the limit.
(6) This Agreement shall become effective on May 1, 2000 and shall
continue in effect until April 30, 2002. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or interested persons (as defined in Investment
Company Act of 1940 (the 1940 Act)) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote
of (a) a majority of the outstanding voting securities of the Fund, as defined
in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Adviser no longer
acts as Adviser to the Fund, the Adviser reserves the right to withdraw from
the Fund the use of the name Templeton or any name misleadingly implying a
continuing relationship between the Fund and the Adviser or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither the
Adviser nor its officers, directors, employees or agents shall be subject to
any liability for any error of judgment, mistake of law, or any loss arising
out of any investment or other act or omission in the performance by the
Adviser of its duties under the Agreement or for any loss or damage resulting
from the imposition by any government of exchange control restrictions which
might affect the liquidity of the Trust's assets, or from acts or omissions of
custodians, or securities depositories, or from any war or political act of any
foreign government to which such assets might be exposed, or failure, on the
part of the custodian or otherwise, timely to collect payments, except for any
liability, loss or damage resulting from willful misfeasance, bad faith or
gross on the Adviser's part or by reason of disregard of the Adviser's duties
under this Agreement. It is hereby understood and acknowledged by the Trust
that the value of the investments made for the Fund may increase as well as
decrease and are not guaranteed by the Adviser. It is further understood and
acknowledged by the Trust that investment decisions made on behalf of the Fund
by the Adviser are subject to a variety of factors which may affect the values
and income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Adviser will not always be profitable or prove
to have been correct.
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(11) It is understood that the services of Adviser are not deemed to be
exclusive, and nothing in this Agreement shall prevent the Adviser, or any
affiliate thereof, from providing similar services to other investment
companies and other clients, including clients which may invest in the same
types of securities as the Fund, or, in providing such services, from using
information furnished by others. When the Adviser determines to buy or sell the
same security for the Fund that the Adviser or one or more of its affiliates
has selected for clients of the Adviser or its affiliates, the orders for all
such security transactions shall be placed for execution by methods determined
by the Adviser, with approval by the Trust's Board of Trustees, to be impartial
and fair.
(12) This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
as being inconsistent with applicable Federal and state securities laws and any
rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Adviser an
agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders of
shares of the Fund nor any Trustee, officer, agent or employee of the Trust
shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
on behalf of Templeton Developing
Markets Equity Fund
By:______________________________
TEMPLETON ASSET MANAGEMENT LTD.
By:______________________________
83
<PAGE>
EXHIBIT IV
INVESTMENT ADVISORY AGREEMENT
AGREEMENT DATED AS OF THE___ DAY OF______, 2000, BETWEEN FRANKLIN
TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, A MASSACHUSETTS BUSINESS TRUST
(THE TRUST), ON BEHALF OF TEMPLETON INTERNATIONAL EQUITY FUND, A SERIES OF THE
TRUST (THE FUND), AND TEMPLETON INVESTMENT COUNSEL, INC., A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF FLORIDA (THE ADVISER).
In consideration of the mutual agreements herein made, the Trust and the
Adviser understand and agree as follows:
(1) The Adviser agrees, during the life of this Agreement, to manage the
investment and reinvestment of the Fund's assets consistent with the provisions
of the Declaration of Trust of the Trust and the investment policies adopted
and declared by the Trust's Board of Trustees. 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 all such steps as may be necessary to implement those determinations. It
is understood that all acts of the Adviser in performing this Agreement are
performed by it outside the United States.
(2) The Adviser is not required to furnish any personnel, overhead items
or facilities for the Fund, including trading desk facilities or daily pricing
of the Fund's portfolio.
(3) The Adviser shall be responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as brokers) for the execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
A. Purchase and sale orders will usually be placed with brokers which are
selected by the Adviser as able to achieve best execution of such orders. Best
execution shall mean prompt and reliable execution at the most favorable
security price, taking into account the other provisions hereinafter set forth.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Adviser in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Adviser shall take
into account its past experience as to brokers qualified to achieve best
execution, including brokers who specialize in any foreign securities held by
the Fund.
C. The Adviser is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the 1934 Act), for the
Fund and/or other accounts, if any, for which the Adviser exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to
transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
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commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the Trust
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Adviser will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith,
the Adviser shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Trust's brokerage policy; that the
research services provide lawful and appropriate assistance to the Adviser in
the performance of its investment decision-making responsibilities; and that
the commissions paid were within a reasonable range. Whether commissions were
within a reasonable range shall be based on any available information as to the
level of commission known to be charged by other brokers on comparable
transactions, but there shall be taken into account the Trust's policies that
(i) obtaining a low commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is more beneficial to
the Fund to obtain a favorable price than to pay the lowest commission; and
(ii) the quality, comprehensiveness and frequency of research studies that are
provided for the Adviser are useful to the Adviser in performing its advisory
services under this Agreement. Research services provided by brokers to the
Adviser are considered to be in addition to, and not in lieu of, services
required to be performed by the Adviser under this Agreement. Research
furnished by brokers through which the Fund effects securities transactions may
be used by the Adviser for any of its accounts, and not all research may be
used by the Adviser for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage commission
rates, account may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary market
makers acting as principal, except where, in the judgment of the Adviser,
better prices and execution may be obtained on a commission basis or from other
sources.
E. Sales of the Fund's shares (which shall be deemed to include also
shares of other registered investment companies which have either the same
adviser or an investment adviser affiliated with the Adviser) by a broker are
one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall furnish best
execution, as defined in subparagraph A above, and that such allocation shall
be within the scope of the Trust's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund shares is
taken into account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus research services, without
taking account of or placing any value upon such sale of the Fund's shares.
(4) In addition to the investment management services provided pursuant to
paragraph (1) above, the Adviser agrees, during the life of this Agreement, to
furnish or provide for the Fund, at the Adviser's expenses, such administrative
services as are required to facilitate investment in the shares of the Fund by
an insurance company, on behalf of one or more of its separate accounts,
pursuant to a fund participation agreement among the Fund, Franklin Templeton
Distributors, Inc. and such insurance company. Such services may include, but
are not limited to, the following: maintaining books and records required by
applicable state or federal laws; assisting in processing purchase and
redemption transactions; transmitting to the Fund periodic reports necessary to
enable the Fund to comply with applicable laws; processing Fund distributions;
answering questions and handling correspondence from contractowners about their
accounts; providing information about the Fund; acting as sole shareholder of
record and nominee for shareholders; and similar administrative, recordkeeping,
and contractowner services.
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(5) The Fund agrees to pay to the Adviser a monthly fee in dollars based
on a percentage of the Fund's average daily net assets, payable at the end of
each calendar month. This fee shall be calculated daily at the following annual
rates:
0.75% of the value of the Fund's net assets up to an including $200
million;
0.675% of the value of the Fund's net assets over $200 million up to and
including $1.3 billion;
0.60% of the value of the Fund's net assets over $1.3 billion.
The Adviser may waive in advance all or a portion of its fee provided for
hereunder and such waiver will 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 fully set forth herein.
Notwithstanding the foregoing, if the total expenses of the Fund (including the
fee to the Adviser) in any fiscal year of the Trust exceed any expense
limitation imposed by applicable State law, the Adviser shall reimburse the
Fund for such excess in the manner and to the extent required by applicable
State law. The term total expenses, as used in this paragraph, does not include
interest, taxes, litigation expenses, distribution expenses, brokerage
commissions or other costs of acquiring or disposing of any of the Fund's
portfolio securities or any costs or expenses incurred or arising other than in
the ordinary and necessary course of the Fund's business. When the accrued
amount of such expenses exceeds this limit, the monthly payment of the
Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Trust's fiscal year if
accrued expenses thereafter fall below the limit.
(6) This Agreement shall become effective on May 1, 2000 and shall
continue in effect until April 30, 2002. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in Investment
Company Act of 1940 (the 1940 Act)) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote
of (a) a majority of the outstanding voting securities of the Fund, as defined
in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Adviser no longer
acts as Adviser to the Fund, the Adviser reserves the right to withdraw from
the Fund the use of the name Templeton or any name misleadingly implying a
continuing relationship between the Fund and the Adviser or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither the
Adviser nor its officers, directors, employees or agents shall be subject to
any liability for any error of judgment, mistake of law, or any loss arising
out of any investment or other act or omission in the performance by the
Adviser of its duties under the Agreement or for any loss or damage resulting
from the imposition by any government of exchange control restrictions which
might affect the liquidity of the Trust's assets, or from acts or omissions of
custodians, or securities depositories, or from any war or political act of
86
<PAGE>
any foreign government to which such assets might be exposed, or failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross on the Adviser's part or by reason of disregard of the Adviser's duties
under this Agreement. It is hereby understood and acknowledged by the Trust
that the value of the investments made for the Fund may increase as well as
decrease and are not guaranteed by the Adviser. It is further understood and
acknowledged by the Trust that investment decisions made on behalf of the Fund
by the Adviser are subject to a variety of factors which may affect the values
and income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Adviser will not always be profitable or prove
to have been correct.
(11) It is understood that the services of Adviser are not deemed to be
exclusive, and nothing in this Agreement shall prevent the Adviser, or any
affiliate thereof, from providing similar services to other investment
companies and other clients, including clients which may invest in the same
types of securities as the Fund, or, in providing such services, from using
information furnished by others. When the Adviser determines to buy or sell the
same security for the Fund that the Adviser or one or more of its affiliates
has selected for clients of the Adviser or its affiliates, the orders for all
such security transactions shall be placed for execution by methods determined
by the Adviser, with approval by the Trust's Board of Trustees, to be impartial
and fair.
(12) This Agreement shall be construed in accordance with the laws of the
State of Florida, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Adviser an
agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders of
shares of the Fund nor any Trustee, officer, agent or employee of the Trust
shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
on behalf of Templeton International
Equity Fund
By:_________________________________
TEMPLETON INVESTMENT COUNSEL, INC.
By:_________________________________
87
<PAGE>
EXHIBIT V
ADDITIONAL INFORMATION ON THE INVESTMENT ADVISERS AND
CERTAIN PORTFOLIO MANAGERS
THE INVESTMENT ADVISERS
The funds' investment managers and their affiliates manage over $218
billion in assets. Franklin Templeton is one of the largest mutual fund
organizations in the United States, and offers 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
organization four years later.
o Franklin Advisers, Inc., 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California, 94403-7777.
o Franklin Mutual Advisers, LLC, 51 John F. Kennedy Parkway, Short Hills,
New Jersey, 07078.
o Templeton Asset Management Ltd., 7 Temasek Blvd. #38-03, Suntec Tower One,
Singapore, 038987.
o Templeton Global Advisors Limited, Lyford Cay Nassau, N.P., Bahamas.
o Templeton Investment Counsel, Inc., Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida, 33394.
FRANKLIN ADVISERS, INC. Franklin Advisers, Inc. (FAV) is a California
corporation formed on October 31, 1985 and is based in San Mateo, California.
FAV is registered as an investment adviser with the SEC under the Investment
Advisers Act of 1940. It is also registered as an investment adviser in the
State of California. FAV is a wholly owned subsidiary of Franklin Resources,
Inc. (Resources), 777 Mariners Island Blvd., San Mateo, California 94404-1585.
Resources is primarily engaged, through various subsidiaries, in providing
investment management, share distribution, transfer agent and administrative
services to a family of investment companies. Resources is an NYSE, Inc. listed
holding company (NYSE: BEN). Resources principal shareholders are Charles B.
Johnson and Rupert H. Johnson, both principal officers and trustees of the
Trust, who own approximately 20% and 16%, respectively, of Resources
outstanding shares. FAV provides investment advisory and portfolio management
services to most of the funds in the Franklin Group of Funds.
The principal executive officers of FAV are:
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ----------------------------------- ---------------------- --------------------------
<S> <C> <C>
Charles B. Johnson
Director and 777 Mariners Island Blvd.
Chairman of the Board ............ Executive Manager San Mateo, California
Rupert H. Johnson, Jr. 777 Mariners Island Blvd.
Director and President ........... Securities Analyst San Mateo, California
R. Martin Wiskemann 777 Mariners Island Blvd.
Director and Senior Vice President Securities Analyst San Mateo, California
Harmon E. Burns 777 Mariners Island Blvd.
Executive Vice President ......... Attorney San Mateo, California
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ----------------------------------- ---------------------- --------------------------
<S> <C> <C>
Martin L. Flanagan 777 Mariners Island Blvd.
Executive Vice President ......... Accountant San Mateo, California
Deborah R. Gatzek
Executive Vice President 777 Mariners Island Blvd.
and Assistant Secretary .......... Attorney San Mateo, California
Edward B. Jamieson 777 Mariners Island Blvd.
Executive Vice President ......... Securities Analyst San Mateo, California
Thomas J. Kenny 777 Mariners Island Blvd.
Executive Vice President ......... Securities Analyst San Mateo, California
Jack Lemein 777 Mariners Island Blvd.
Executive Vice President ......... Securities Analyst San Mateo, California
Sheila Amoroso 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Matt Avery 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Roger Bayston 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
David Capurro 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Rafael Costas 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Frank M. Felicelli 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Sally Haff 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Conrad Herrmann 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Chauncey Lufkin 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Christopher Molumphy 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Thomas Runkel 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Bernard Schroer 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Thomas Walsh 777 Mariners Island Blvd.
Senior Vice President ............ Securities Analyst San Mateo, California
Benjamin Barber 777 Mariners Island Blvd.
Vice President ................... Securities Analyst San Mateo, California
Doug Barton 777 Mariners Island Blvd.
Vice President ................... Securities Analyst San Mateo, California
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------- ---------------------- --------------------------
<S> <C> <C>
Catherine Bowman 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Kenneth Broad 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Molly Butler 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Canyon Chan 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Tony Coffey 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Lisa Costa 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Fred Fromm 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Shan Green 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
John Hopp 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Steven Hiatt 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Jeff Holbrook 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Charles E. Johnson 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Gregory E. Johnson 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Ian Link 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Michael McCarthy 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Evan McCulloch 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Thomas Orphanos 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Mark Orsi 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Scott Owens 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Serena Perin 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Ed Perks 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------- ---------------------- --------------------------
<S> <C> <C>
John Pomeroy 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
David Rath 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Betsy Schwab 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Kent Shepherd 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Richard Smyth 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Theresa Spath 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Eric Takaha 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Kurt Von Emster 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Glenn Voyles 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
John Wiley 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Jeffrey Wilson 205 9th Street N.
Vice President ......... Securities Analyst St. Petersburg, Florida
Stella Wong 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Robert Yolland 777 Mariners Island Blvd.
Vice President ......... Securities Analyst San Mateo, California
Charles R. Sims 777 Mariners Island Blvd.
Vice President ......... Accountant San Mateo, California
Kenneth A. Lewis 777 Mariners Island Blvd.
Vice President ......... Accountant San Mateo, California
Leslie M. Kratter 777 Mariners Island Blvd.
Secretary .............. Attorney San Mateo, California
</TABLE>
Some of trustees or officers of the VIP Trust (whose addresses and
biographical information are included in the VIP Trust's statement of
additional information) also serve as directors or officers of FAV. These
trustees and officers are listed below:
Charles B. Johnson Harmon E. Burns
Charles E. Johnson Martin L. Flanagan
Rupert H. Johnson, Jr. Deborah R. Gatzek
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
91
<PAGE>
FRANKLIN MUTUAL ADVISERS, LLC. Franklin Mutual Advisers, LLC ("FMAI") is a
limited liability company formed March 31, 1999 in Delaware, and is based in
Short Hills, New Jersey. Franklin Mutual Advisers, Inc. was merged into FMAI as
of April 1, 1999. FMAI is registered as an investment adviser and provides
investment management services for certain funds in the Franklin Templeton
Group of Funds. FMAI is a wholly-owned subsidiary of Franklin Templeton
Distributors, Inc., which is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), 777 Mariners Island Blvd. San Mateo, California 94404-1585.
Resources is primarily engaged, through various subsidiaries, in providing
investment management, share distribution, transfer agent and administrative
services to a family of investment companies. Resources is an NYSE, Inc. listed
holding company (NYSE: BEN). Resources principal shareholders are Charles B.
Johnson and Rupert H. Johnson who own approximately 20% and 16%, respectively,
of Resources outstanding shares.
The principal executive officers of FMAI are:
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- -------------------------------------------------- ---------------------- ------------------------------
<S> <C> <C>
Michael F. Price 51 John F. Kennedy Parkway
Chairman ....................................... Executive Manager Short Hills, New Jersey 07078
Peter A. Langerman 51 John F. Kennedy Parkway
President and Chief Executive Officer .......... Securities Analyst Short Hills, New Jersey 07078
Jeffrey Altman 51 John F. Kennedy Parkway
Senior Vice President .......................... Securities Analyst Short Hills, New Jersey 07078
Martin Flanagan
Senior Vice President and 777 Mariners Island Blvd.
Chief Financial Officer ........................ Accountant San Mateo, California 94404
Robert Friedman
Senior Vice President and 51 John F. Kennedy Parkway
Chief Investment Officer ....................... Securities Analyst Short Hills, New Jersey 07078
Ray Garea 51 John F. Kennedy Parkway
Senior Vice President .......................... Securities Analyst Short Hills, New Jersey 07078
Larry Sondike 51 John F. Kennedy Parkway
Senior Vice President .......................... Securities Analyst Short Hills, New Jersey 07078
David Marcus 51 John F. Kennedy Parkway
Senior Vice President .......................... Securities Analyst Short Hills, New Jersey 07078
David Winters 51 John F. Kennedy Parkway
Senior Vice President .......................... Securities Analyst Short Hills, New Jersey 07078
Jeff Diamond 51 John F. Kennedy Parkway
Vice President ................................. Securities Analyst Short Hills, New Jersey 07078
Deborah R. Gatzek 777 Mariners Island Blvd.
Vice President and Assistant Secretary ......... Attorney San Mateo, California 94404
Ephraim Karpel 51 John F. Kennedy Parkway
Vice President--Trading ........................ Operations Executive Short Hills, New Jersey 07078
Andrea Kraszewski 51 John F. Kennedy Parkway
Vice President--Arbitrage ...................... Operations Executive Short Hills, New Jersey 07078
Susan Potto 51 John F. Kennedy Parkway
Vice President ................................. Securities Analyst Short Hills, New Jersey 07078
Magali (Lily) Simo 51 John F. Kennedy Parkway
Vice President--Sales and Marketing ............ Marketing Executive Short Hills, New Jersey 07078
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------------ ---------------------- ------------------------------
<S> <C> <C>
Leigh Walzer 51 John F. Kennedy Parkway
Vice President ................... Securities Analyst Short Hills, New Jersey 07078
Bradley Takahashi 51 John F. Kennedy Parkway
Assistant Vice President ......... Operations Executive Short Hills, New Jersey 07078
Charles R. Sims 777 Mariners Island Blvd.
Treasurer ........................ Accountant San Mateo, California 94404
Kenneth A. Lewis 777 Mariners Island Blvd.
Controller ....................... Accountant San Mateo, California 94404
Leslie M. Kratter 777 Mariners Island Blvd.
Secretary ........................ Attorney San Mateo, California 94404
</TABLE>
Some of the trustees or officers of the VIP Trust (whose addresses and
biographical information are included in the VIP Trust's statement of
additional information) also serve as directors or officers of FMAI. These
trustees and officers are listed below.
Martin L. Flanagan
Deborah R. Gatzek
TEMPLETON ASSET MANAGEMENT LTD. Templeton Asset Management Ltd. (TAML) is
a corporation organized under the laws of and based in Singapore. It is
registered as an investment adviser in Singapore and Hong Kong. It is also
registered with the SEC under the Advisers Act. TAML is a wholly-owned
subsidiary of Templeton International Inc., which is a subsidiary of Templeton
Worldwide, Inc., which, in turn, is a wholly-owned subsidiary of Franklin
Resources, Inc. (Resources), 777 Mariners Island Blvd., San Mateo, California
94404-1585. Resources is primarily engaged, through various subsidiaries, in
providing investment management, share distribution, transfer agent and
administrative services to a family of investment companies. Resources is an
NYSE, Inc. listed holding company (NYSE: BEN). Resources principal shareholders
are Charles B. Johnson and Rupert H. Johnson, both principal officers and
trustees of the Trust, who own approximately 20% and 16%, respectively, of
Resources outstanding shares. TAML provides investment advisory and related
services to certain Templeton funds and portfolios. TAML is principally an
investment adviser to emerging market equity portfolios.
There are no officers of corporations per se in Singapore, only directors
and managing directors. They act in a capacity of an officer for U.S. purposes,
such actions constituting the actions of an officer.
<TABLE>
<CAPTION>
DIRECTORS PRINCIPAL OCCUPATION ADDRESS
- ------------------- ---------------------- --------------------------
<S> <C> <C>
Martin L. Flanagan 777 Mariners Island Blvd.
Director ......... Accountant San Mateo, California
Mark G. Holowesko Box N-7759 Lyford Cay
Director ......... Securities Analyst Nassau, Bahamas
Charles E. Johnson 777 Mariners Island Blvd.
Director ......... Securities Analyst San Mateo, California
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS PRINCIPAL OCCUPATION ADDRESS
- ---------------------------- ---------------------- -------------------------
<S> <C> <C>
7 Temasek Blvd.,
Lim Chong Boon (Dennis) Suntec Tower One
Director .................. Securities Analyst Singapore
Gregory E. McGowan 500 East Broward Blvd.
Director .................. Attorney Fort Lauderdale, Florida
7 Temasek Blvd.,
J. Mark Mobius Suntec Tower One
Managing Director ......... Securities Analyst Singapore
Murray L. Simpson 2701 Shui On Center
Director .................. Attorney Hong Kong, China
7 Temasek Blvd.,
Wai Kwok (Tom) Suntec Tower One
Director .................. Securities Analyst Singapore
</TABLE>
Some of trustees or officers of the VIP Trust (whose addresses and
biographical information are included in the VIP Trust's statement of
additional information) also serve as directors of TAML. These trustees and
officers are listed below:
Marty L. Flanagan
Charles E. Johnson
TEMPLETON GLOBAL ADVISORS LIMITED. Templeton Global Advisors Limited
(TGAL) is a Bahamian corporation located in Nassau, Bahamas. TGAL is registered
as an investment adviser with the SEC under the Advisers Act. . TGAL is a
wholly owned subsidiary of T.G.H. Holdings, Ltd., which is a subsidiary of
Templeton International, Inc., which, in turn, is a wholly-owned subsidiary of
Franklin Resources, Inc. (Resources), 777 Mariners Island Blvd., San Mateo,
California 94404-1585. Resources is primarily engaged, through various
subsidiaries, in providing investment management, share distribution, transfer
agent and administrative services to a family of investment companies.
Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources
principal shareholders are Charles B. Johnson and Rupert H. Johnson, both
principal officers and trustees of the Trust, who own approximately 20% and
16%, respectively, of Resources outstanding shares. TGAL provides investment
advisory and portfolio management services to certain of the Templeton funds
and separate accounts. TGAL is the principal investment adviser to the
Templeton funds.
The principal executive officers of TGAL are:
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------------------------- ---------------------- --------------------------
<S> <C> <C>
Mark G. Holowesko Box N-7759 Lyford Cay
Director and President ........................ Securities Analyst Nassau, Bahamas
Martin L. Flanagan 777 Mariners Island Blvd.
Director and Executive Vice President ......... Accountant San Mateo, California
7 Temasek Blvd.,
J. Mark Mobius Suntec Tower One
Director and Executive Vice President ......... Securities Analyst Singapore,
Charles B. Johnson 777 Mariners Island Blvd.
Director ...................................... Executive Manager San Mateo, California
Charles E. Johnson 777 Mariners Island Blvd.
Director ...................................... Securities Analyst San Mateo, California
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- -------------------------------------------------- ---------------------- --------------------------
<S> <C> <C>
Jeffrey A. Everett Box N-7759 Lyford Cay
Executive Vice President ....................... Securities Analyst Nassau, Bahamas
Gregory E. McGowan 500 East Broward Blvd.
Executive Vice President and Secretary ......... Attorney Fort Lauderdale, Florida
Richard Sean Farrington Box N-7759 Lyford Cay
Senior Vice President .......................... Securities Analyst Nassau, Bahamas
Timothy Brown Box N-7759 Lyford Cay
Vice President and Treasurer ................... Accountant Nassau, Bahamas
Deborah R. Gatzek 777 Mariners Island Blvd.
Vice President ................................. Attorney San Mateo, California
Cindy Sweeting Box N-7759 Lyford Cay
Vice President ................................. Securities Analyst Nassau, Bahamas
Dale Winner Box N-7759 Lyford Cay
Vice President ................................. Securities Analyst Nassau, Bahamas
</TABLE>
Some of trustees or officers of the VIP Trust (whose addresses and
biographical information are included in the VIP Trust's statement of
additional information) also serve as directors or officers of TGAL. These
trustees and officers are listed below:
Marty L. Flanagan
Charles B. Johnson
Charles E. Johnson
Deborah R. Gatzek
Note: Charles B. Johnson is the father of Charles E. Johnson
TEMPLETON INVESTMENT COUNSEL, INC. Templeton Investment Counsel, Inc.
(TICI) is a Florida corporation formed in October 1979 and whose address is 500
East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida. TICI is a wholly
owned subsidiary of Templeton Global Investors, Inc., which is a subsidiary of
Templeton Worldwide, Inc., which, in turn, is a wholly-owned subsidiary of
Franklin Resources, Inc. (Resources), 777 Mariners Island Blvd., San Mateo,
California 94404-1585. Resources is primarily engaged, through various
subsidiaries, in providing investment management, share distribution, transfer
agent and administrative services to a family of investment companies.
Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources
principal shareholders are Charles B. Johnson and Rupert H. Johnson, both
principal officers and trustees of the Trust, who own approximately 20% and
16%, respectively, of Resources outstanding shares. TICI is the principal
investment adviser to managed and institutional accounts. In addition, it
provides portfolio management services to certain of the Templeton funds and
sub-advisory services to certain of the Franklin funds.
The principal executive officers of TICI are:
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ---------------------------------- ---------------------- --------------------------
<S> <C> <C>
Charles E. Johnson 777 Mariners Island Blvd.
Director and Chairman ........... Securities Analyst San Mateo, California
Donald F. Reed 500 East Broward Blvd.
President and Director ......... Securities Analyst Ft. Lauderdale, Florida
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------------------------- ------------------------- --------------------------
<S> <C> <C>
Martin L. Flanagan
Director, Executive Vice President and 777 Mariners Island Blvd.
Chief Operating Officer ....................... Accountant San Mateo, California
Gregory E. McGowan 500 East Broward Blvd.
Director and Executive Vice President ......... Attorney Fort Lauderdale, Florida
Gary Paul Motyl 500 East Broward Blvd.
Director and Executive Vice President ......... Securities Analyst Fort Lauderdale, Florida
W. Denman Zirkle 500 East Broward Blvd.
Executive Vice President ...................... Sales & Client Services Fort Lauderdale, Florida
Niels E. Andersen
Director and Senior Vice President of 500 East Broward Blvd.
Institutional Business Development ............ Marketing Fort Lauderdale, Florida
Mark R. Beveridge 500 East Broward Blvd.
Senior Vice President ......................... Securities Analyst Fort Lauderdale, Florida
Gary R. Clemons 500 East Broward Blvd.
Senior Vice President ......................... Securities Analyst Fort Lauderdale, Florida
William T. Howard, Jr. 500 East Broward Blvd.
Senior Vice President ......................... Securities Analyst Fort Lauderdale, Florida
Charles Reed Hutchens 500 East Broward Blvd.
Senior Vice President ......................... Client Services Fort Lauderdale, Florida
Elizabeth M. Knoblock
Vice President, General Counsel and 500 East Broward Blvd.
Secretary ..................................... Attorney Fort Lauderdale, Florida
Peter A. Nori 500 East Broward Blvd.
Senior Vice President ......................... Securities Analyst Fort Lauderdale, Florida
Simon Rudolph 500 East Broward Blvd.
Senior Vice President ......................... Securities Analyst Fort Lauderdale, Florida
Catherine B. Alsop 500 East Broward Blvd.
Vice President ................................ Securities Analyst Fort Lauderdale, Florida
Heidi C. Andersen 500 East Broward Blvd.
Vice President ................................ Securities Analyst Fort Lauderdale, Florida
Peter D. Anderson 500 East Broward Blvd.
Vice President ................................ Securities Analyst Fort Lauderdale, Florida
Jean M. Cabot 500 East Broward Blvd.
President ..................................... Client Services Fort Lauderdale, Florida
Michael J. Corcoran 777 Mariners Island Blvd.
Vice President and Controller ................. Accountant San Mateo, California
Cristina Elias 500 East Broward Blvd.
Vice President ................................ Client Services Fort Lauderdale, Florida
Norman R. Frisbie 777 Mariners Island Blvd.
Vice President ................................ Sales San Mateo, California
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- -------------------------------- ---------------------- --------------------------
<S> <C> <C>
Deborah R. Gatzek 777 Mariners Island Blvd.
Vice President ............... Attorney San Mateo, California
Douglas J. Gooding 500 East Broward Blvd.
Vice President ............... Client Services Fort Lauderdale, Florida
Robert G. Paulson 500 East Broward Blvd.
Vice President ............... Sales Fort Lauderdale, Florida
John B. Rovick 500 East Broward Blvd.
Vice President ............... Marketing Fort Lauderdale, Florida
Sandra Schoren-Testa 500 East Broward Blvd.
Vice President ............... Client Services Fort Lauderdale, Florida
Edgerton Scott 500 East Broward Blvd.
Vice President ............... Securities Analyst Fort Lauderdale, Florida
Catherine N. Triantis 500 East Broward Blvd.
Vice President ............... Sales Fort Lauderdale, Florida
Ann Margaret Ulrich 500 East Broward Blvd.
Vice President ............... Client Services Fort Lauderdale, Florida
Jeanne S. F. Wong 777 Mariners Island Blvd.
Vice President ............... Client Services San Mateo, California
Guang Yang 500 East Broward Blvd.
Vice President ............... Securities Analyst Fort Lauderdale, Florida
</TABLE>
Some of trustees or officers of the VIP Trust (whose addresses and
biographical information are included in the VIP Trust's statement of
additional information) also serve as directors or officers of TICI. These
trustees and officers are listed below:
Charles B. Johnson
Marty L. Flanagan
PORTFOLIO MANAGEMENT TEAM
In general, the portfolio management team is the same between
corresponding funds, except in three pairs. The three pairs are: (1) the TVP
Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation
Fund; (2) the TVP Templeton International Fund and the VIP Templeton
International Equity Fund; and (3) the TVP Templeton Stock Fund and the TVP
Templeton Global Growth Fund.
97
<PAGE>
<TABLE>
<CAPTION>
TVP TEMPLETON ASSET VIP TEMPLETON GLOBAL
ALLOCATION FUND ASSET ALLOCATION FUND COMBINED FUND
-------------------------- --------------------------- ---------------------
<S> <C> <C> <C>
Portfolio Manager Gary Clemons Dale Winner Gary Clemons
Other Team Members Peter Nori Mark Holowesko Peter Nori
Tucker Scott A team of Templeton Tucker Scott
A team of Templeton Global Bond Managers A team of Templeton
Global Bond Managers Global Bond Managers
TVP TEMPLETON VIP TEMPLETON
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND COMBINED FUND
-------------------------- --------------------------- ---------------------
Portfolio Manager Peter Nori Peter Nori Peter Nori
Other Team Members Gary Motyl Mark Beveridge Mark Beveridge
Heidi Anderson
VIP TEMPLETON GLOBAL
TVP TEMPLETON STOCK FUND GROWTH FUND COMBINED FUND
-------------------------- --------------------------- ---------------------
Portfolio Manager Mark Beveridge Sean Farrington Mark Holowesko
Other Team Members William Howard Jeffrey Everett Sean Farrington
Edwin Lugo II Jeffrey Everett
</TABLE>
Information about each of these persons is set forth below.
HEIDI S. ANDERSEN, CFA
Ms. Andersen is a Vice President of TICI and has been a manager of the TVP
Templeton International Fund since 1998. Ms. Andersen has been with the
Franklin Templeton Group since 1995.
MARK R. BEVERIDGE, CFA
Mr. Beveridge is a Senior Vice President of TICI and has been a manager of
the VIP Templeton International Equity Fund since 1994 and of the TVP Templeton
Stock Fund since 1995. Mr. Beveridge has been with the Franklin Templeton Group
since 1985.
GARY CLEMONS
Mr. Clemens is a Senior Vice President of TICI and has managed the equity
portion of the TVP Templeton Asset Allocation Fund since 1995. Mr. Clemons has
been with the Franklin Templeton Group since 1990.
JEFFREY A. EVERETT, CFA
Mr. Everett is an Executive Vice President of TGAL and has been a manager
of the VIP Templeton Global Growth Fund since its inception in 1994. Mr.
Everett has been with the Franklin Templeton Group since 1989.
RICHARD SEAN FARRINGTON, CFA
Mr. Farrington is a Senior Vice President of TGAL and has been a manager
of the VIP Global Growth Fund since 1995. Mr. Farrington has been with the
Franklin Templeton Group since 1991.
MARK G. HOLOWESKO, CFA
Mr. Holowesko is President of TGAL and has been a manager of the VIP
Global Templeton Asset Allocation since 1999 and will be the manager of the VIP
Templeton Global Growth Fund, effective May 1, 2000. Mr. Holowesko has been
with the Franklin Templeton Group since 1985.
98
<PAGE>
WILLIAM T. HOWARD, JR., CFA
Mr. Howard is a Senior Vice President of TICI and has been a manager of
the TVP Stock Fund since 1996. Mr. Howard has been with the Franklin Templeton
Group since 1993.
EDWIN LUGO II
Mr. Lugo is a portfolio manager of TICI and has been a manager of the TVP
Templeton Stock Fund since 1999. Mr. Lugo has been with the Franklin Templeton
Group since 1996. Prior to joining the Franklin Templeton Group, he worked at
the New Boston Group.
GARY P. MOTYL, CFA
Mr. Motyl is a Director and a Executive Vice President of TICI and has
been a manager of the TVP Templeton International Fund since 1995. Mr. Motyl
has been with the Franklin Templeton Group since 1981.
PETER A. NORI, CFA
Mr. Nori is a Senior Vice President of TICI and has managed the equity
portion of the TVP Asset Allocation Fund since 1996 and has been a manager of
the TVP Templeton International Fund since 1992, and the VIP Templeton
International Equity Fund Inc. since 1999. Mr. Nori has been with the Franklin
Templeton Group since 1987.
TUCKER SCOTT, CFA
Mr. Scott is a Vice President of TICI and has been a manager of the TVP
Asset Allocation Fund since 1998 and has been with the Franklin Templeton Group
since 1996. Prior to joining the Franklin Templeton Group, Mr. Scott worked for
Aeltus Investment Management.
DALE WINNER, CFA
Mr. Winner has been a manager of the VIP Templeton Global Asset Allocation
Fund since 1997. Before joining Templeton Global Advisors Limited (TGAL) and
Franklin Templeton in 1995, he was a trust officer at J.P. Morgan.
99
PROSPECTUS
FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST
CLASS 1 SHARES
FRANKLIN CAPITAL GROWTH FUND
(EFFECTIVE 12/15/99 THE FUND WILL BE NAMED THE
FRANKLIN LARGE CAP GROWTH SECURITIES FUND)
FRANKLIN SMALL CAP FUND
MUTUAL SHARES SECURITIES FUND
TEMPLETON DEVELOPING MARKETS EQUITY FUND
TEMPLETON GLOBAL ASSET ALLOCATION FUND
TEMPLETON GLOBAL GROWTH FUND
TEMPLETON GLOBAL INCOME SECURITIES FUND
TEMPLETON INTERNATIONAL EQUITY FUND
MAY 1, 1999
AS SUPPLEMENTED DECEMBER 1, 1999
(Franklin Templeton Logo Omitted)
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
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
- ------------------------------------
INFORMATION ABOUT EACH FUND i Overview of the Trust
you should know before
investing
Individual Fund Descriptions
FC-1 Franklin Capital Growth Fund
(EFFECTIVE 12/15/99 THE FUND
WILL BE NAMED THE FRANKLIN LARGE
CAP GROWTH SECURITIES FUND)
FS-1 Franklin Small Cap Fund
MS-1 Mutual Shares Securities Fund
TD-1 Templeton Developing Markets
Equity Fund
TA-1 Templeton Global Asset
Allocation Fund
TG-1 Templeton Global Growth Fund
TI-1 Templeton Global Income
Securities Fund
TE-1 Templeton International Equity
Fund
ADDITIONAL INFORMATION, ALL FUNDS
1 Important Recent Developments
2 Distributions and Taxes
FUND ACCOUNT INFORMATION
- ------------------------------------
Information about fund 3 Buying Shares
account transactions
and services 3 Selling Shares
3 Exchanging Shares
3 Fund Account Policies
4 Questions
FOR MORE INFORMATION
- ------------------------------------
Where to learn more about Back Cover
each fund
Franklin Templeton Variable Insurance Products Trust
[INSERT GRAPHIC OF GLOBE]
OVERVIEW
Franklin Templeton Variable Insurance Products Trust (the Trust), formerly
Franklin Valuemark Funds, currently consists of twenty-six separate funds,
offering a wide variety of investment choices. Each fund has two classes of
shares, class 1 and class 2. The funds are only available as investment
options in variable annuity or variable life insurance contracts. The
accompanying contract prospectus 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.
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 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 investments goals.
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
The funds' investment managers and their affiliates manage over $218 billion
in assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Today, Franklin Templeton
is one of the largest mutual fund organizations in the United States, and
offers money management expertise spanning a variety of investment
objectives.
FRANKLIN CAPITAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
Effective December 15, 1999, the fund's name will be changed to Franklin
Large Cap Growth Securities Fund and the fund's strategy will be restated to
one of investing, under normal market conditions, at least 65% of its total
assets in equity securities of U.S. large-cap growth companies ($8.5 billion
or more), focusing on those companies that are expected to have revenue
growth in excess of the economy as a whole either through above-average
industry expansion or market share gains. These companies generally dominate,
or are gaining market share, in their respective industries and have a
reputation for quality of management, as well as superior products and
services.
GOAL The fund's investment goal is capital appreciation.
[Begin callout]
The fund invests primarily in large cap growth companies' equity securities.
[End callout]
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies believed to
be globally competitive and to offer favorable opportunities for long-term
capital appreciation. Following this policy, the fund will typically invest
predominantly in established, large-to medium-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. Equities represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets. They include common and preferred stocks, and
securities convertible into common stock.
PORTFOLIO SELECTION In choosing equity investments, the manager will focus on
companies that have exhibited above average growth, strong financial records,
and large market capitalization. In addition, management expertise, industry
leadership, growth in market share and sustainable competitive advantage are
factors the manager also considers. Although the manager will search for
investments across a large number of industries, it expects to have
significant positions (but not in excess of 25% of its total assets in a
given sector) in the technology (including computers, telecommunications, and
electronics), health care, and finance industries.
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
[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]
The fund's main risks can affect 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 short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector. The
stock prices of companies operating within this sector may be subject to
abrupt or erratic movements. In addition, the activities of
telecommunications companies fall under international, federal and state
regulations. These companies may be adversely affected by changes in
government regulations.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
[Begin callout]
FC-1 Franklin Capital Growth Fund - Class 1
[End callout]
FINANCIAL SERVICES COMPANIES Financial services companies are subject to
extensive government regulation which tends to limit both the amount and
types of loans and other financial commitments such companies can make, and
the interest rates and fees they can charge. These limitations can have a
significant impact on the profitability of a financial services company since
profitability is impacted by the company's ability to make financial
commitments such as loans.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry.
See "Important Recent Developments," in this prospectus for Year 2000
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 SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
FRANKLIN CAPITAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURN 1
[Begin callout]
BEST
QUARTER:
Q4'98
19.73%
WORST
QUARTER:
Q3 '98
- -10.47%
[End callout]
[INSERT BAR GRAPH]
97 98
- -----------------------------
18.31% 20.29%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (05/01/96)
- ----------------------------------------------------------------------
FRANKLIN CAPITAL GROWTH FUND - CLASS 1(1) 20.29% 19.72%
S&P 500(R)INDEX(2) 28.58% 29.00%
RUSSELL 1000 INDEX(R)(2) 27.02% 27.92%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The S&P 500(R)Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Russell 1000 Index measures the 1,000 largest companies in the Russell 3000
Index. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
[Begin callout]
FC-2 Franklin Capital Growth Fund - Class 1
[End callout]
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
KENT SHEPHERD, CFA Mr. Shepherd has been a manager
VICE PRESIDENT, ADVISERS of the fund since April 1999,
and has been with the Franklin
Templeton Group since 1991.
JASON R. NUNN Mr. Nunn has been a manager of
PORTFOLIO MANAGER, ADVISERS the fund since September 1999.
Before joining the Franklin
Templeton Group in 1998 he
worked in corporate finance with
Alex, Brown & Sons.
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager
SENIOR VICE PRESIDENT, ADVISERS of the fund since its inception
in1996, and has been with the
Franklin Templeton Group since
1989.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.75% of its average daily net assets to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ----------------- ------------- --------------- -------------- ----------------- ------------- -------------------------------------
FRANKLIN CAPITAL GROWTH FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996(1) 10.00 .03 1.33 1.36 - - - 11.36
1997 11.36 .06 2.02 2.08 (.02) - (.02) 13.42
1998 13.42 .10 2.62 2.72 (.06) - (.06) 16.08
RATIOS/SUPPLEMENTAL DATA
NET
ASSETS, RATIO OF RATIO OF
TOTAL END OF EXPENSES TO NET INVEST- PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ----------------- ------------- --------------- -------------- ----------------- -------------
FRANKLIN CAPITAL GROWTH FUND
<C> <C> <C> <C> <C> <C>
1996(1) 13.60 44,667 .77* .96* 3.91
1997 18.31 109,355 .77 .72 19.90
1998 20.29 220,952 .77 1.00 12.17
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
(1). For the period May 1, 1996 (effective date) to December 31, 1996.
[Begin callout]
FC-3 Franklin Capital Growth Fund - Class 1
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
FRANKLIN SMALL CAP FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) growth companies. Small cap companies are
generally those with market cap values (share price times the number of
common stock shares outstanding) of less than $1.5 billion, at the time of
purchase. Equities represent ownership interests in individual companies and
give shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "growth at a reasonable price" strategy. As a
"bottom-up" investor focusing primarily on individual securities, the manager
chooses small cap companies that it believes are positioned for rapid growth
in revenues, earnings or assets, and are selling at reasonable prices. The
manager relies on a team of analysts to provide in-depth industry expertise
and uses both qualitative and quantitative analysis to evaluate companies for
distinct and sustainable competitive advantages. Such advantages as a
particular marketing or product niche, proven technology, and industry
leadership are all factors the manager believes point to strong long-term
growth potential. The manager diversifies the fund's assets across many
industries, and from time to time may invest substantially in certain
sectors, including technology and biotechnology.
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
[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]
The fund's main risks can affect 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 short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies companies may offer greater
opportunities for capital growth than larger, more established companies,
they also have more risk. Historically, smaller company securities have been
more volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries, or
their new products or services may not find an established market or may
become quickly obsolete. Smaller companies may also suffer significant
losses, their securities can be less liquid, and investments in these
companies may be speculative. Technology and biotechnology industry stocks,
in particular, can be subject to erratic or abrupt price movements.
See "Important Recent Developments" in this prospectus for Year 2000
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 SAI.
[Begin callout]
FS-1 Franklin Small Cap Fund - Class 1
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[Begin callout]
BEST
QUARTER:
Q4 '98
24.38%
WORST
QUARTER:
Q3 '98
- -23.40%
[End callout]
[Insert bar graph]
96 97 98
- ---------------------------
28.95% 17.42% -0.98%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (11/01/95)
- --------------------------------------------------------------------
FRANKLIN SMALL CAP FUND - CLASS 1(1) -0.98% 14.51%
S&P 500(R)INDEX(2) 28.58% 29.09%
RUSSELL 2500 INDEX(R)(2) 0.38% 15.45%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The S&P 500(R)Index is an unmanaged
group of widely held common stocks, whereas the Russell 2500(R)Index is an
index of 2,500 companies with small market capitalizations, both covering a
variety of industries. Indices include reinvested dividends and/or interest.
One cannot invest directly in an index, nor is an index representative of the
fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
EDWARD B. JAMIESON Mr. Jamieson has been a manager of
EXECUTIVE VICE PRESIDENT, the fund since its inception in
ADVISERS 1995, and has been with the Franklin
Templeton Group since 1987.
MICHAEL MCCARTHY Mr. McCarthy has been a manager of
VICE PRESIDENT, ADVISERS the fund since its inception in
1995. He joined the Franklin
Templeton Group in 1992.
AIDAN O'CONNELL Mr. O'Connell has been a manager of
PORTFOLIO MANAGER, ADVISERS the fund since September 1998.
Before joining Franklin Templeton in
May 1998, Mr. O'Connell was a
research analyst and a corporate
financial analyst at Hambrecht &
Quist.
The fund pay the manager a fee for managing its assets, making its investment
decisions, and providing certain administrative facilities and services for
the fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of
its average daily net assets to the manager.
[Begin callout]
FS-2 Franklin Small Cap Fund - Class 1
[End callout]
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
---------------------------------------------------------------------------------------------------------------
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ---------------------- --------------- ----------- ---------------- ----------------- -------------- ----------- ----------- -------
FRANKLIN SMALL CAP FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995(1) 10.00 .03 .21 .24 - - - 10.24
1996 10.24 .02 2.95 2.97 (.01) - (.01) 13.20
1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05
1998 15.05 .07 (.20) (.13) (.01) (1.19) (1.20) 13.72
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
NET RATIO OF
ASSETS, RATIO OF NET INVEST-
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ---------------------- -------------------- -------------- ---------------- ----------------- --------------
FRANKLIN SMALL CAP FUND
<C> <C> <C> <C> <C> <C>
1995(1) 2.30 13,301 .90* 2.70* 16.04
1996 28.95 170,969 .77 .63 63.72
1997 17.42 313,462 .77 .06 64.07
1998 (.98) 315,460 .77 .51 53.01
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
(1). For the period November 1, 1995 (effective date) to December 31, 1995.
[Begin callout]
FS-3 Franklin Small Cap Fund - Class 1
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
MUTUAL SHARES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's principal goal is capital appreciation. Its secondary goal is
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies that the
manager believes are available at market prices less than their actual value
based on certain recognized or objective criteria (intrinsic value).
Following this value-oriented strategy, the fund will primarily invest in:
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
o UNDERVALUED STOCKS STOCKS trading at a discount to asset value.
o REORGANIZING COMPANIES Securities of companies in the midst of change such
as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers or
likely to receive such offers (Reorganizing Companies). The fund may
participate in such transactions.
o DISTRESSED COMPANIES Securities of companies that are distressed or even in
bankruptcy.
The fund invests primarily in companies with market capitalization values
(share price times the number of common stock shares outstanding) greater
than $1.5 billion, but may invest a small portion in small-cap companies,
which have more risk. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
They include common and preferred stocks, and securities convertible into
common stock.
While the fund generally purchases securities for investment purposes, the
manager may use the fund's ownership in a company to seek to influence or
control management, or invest in other companies that do so, when the manager
believes the fund may benefit.
The fund may invest in debt securities rated in any rating category
established by an independent rating agency, including high yield, lower
rated or defaulted debt securities ("junk bonds"), or if unrated, determined
by the manager to be comparable. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Common debt securities are bonds, including bonds convertible
into common stock or unsecured bonds; notes; and short-term investments,
including cash or cash equivalents.
The fund typically invests in unrated and lower rated debt securities of
Reorganizing Companies or Distressed Companies. Such debt securities are
primarily secured or unsecured indebtedness or participations in the
indebtedness, including loan participations and trade claims. Indebtedness
represents a specific commercial loan or portion of a loan which has been
given to a company by a financial institution such as a bank or insurance
company. By purchasing direct indebtedness of companies, a fund steps into
the shoes of a financial institution. Participation interests in indebtedness
represent fractional interests in a company's indebtedness.
The fund currently intends to invest up to approximately 20% of its total
assets in foreign equity and debt securities, including American, European
and Global Depositary Receipts. Depositary receipts are certificates
typically issued by a bank or trust company that give their holders the right
to receive securities issued by a foreign or domestic company. The fund
generally seeks to hedge (protect) against currency risks, largely using
forward foreign currency exchange contracts, where available, and in the
manager's opinion, it is economical to do so (Hedging Instruments).
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value strategy. In choosing equity investments, the
manager focuses on the market price of a company's securities relative to its
evaluation of the company's asset value, including an analysis of book value,
cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected
based on the manager's own analysis of the security's intrinsic value rather
than the coupon rate or rating. Thus, each security is examined separately
and there are no set criteria as to asset size, earnings or industry type.
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 U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goals.
[Begin callout]
MS-1 Mutual Shares Securities Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
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.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.
REORGANIZED OR DISTRESSED COMPANIES The fund's bargain-driven focus may
result in the fund choosing securities that are not widely followed by other
investors, including companies reporting poor earnings, companies whose share
prices have declined sharply, turnarounds, cyclical companies, or companies
emerging from bankruptcy, which may have higher risk. There can be no
assurance that any merger or other restructuring, or tender or exchange offer
proposed at the time the fund invests in a Reorganizing Company will be
completed on the terms contemplated and therefore, benefit the fund.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
Country General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. The political, economic, and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluations by a country's government or banking
authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
INDEBTEDNESS AND PARTICIPATIONS The purchase of debt securities of
Reorganizing or Distressed Companies always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. There are no established markets for indebtedness, making them less
liquid than other securities, and purchasers of participations, such as the
fund, must rely on the financial institution issuing the participation to
assert any rights against the borrower with respect to the underlying
indebtedness. In addition, the fund takes on the risk as to the
creditworthiness of the bank or other financial intermediary issuer, as well
as of the issuer of the underlying indebtedness.
LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to
encounter financial difficulties and be more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates.
If an issuer stops paying interest and/or principal, payments may never
resume. The fund may lose its entire investment on bonds that may be, or are,
in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
[Begin callout]
MS-2 Mutual Shares Securities Fund - Class 1
[End callout]
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, market activity, large
sustained sales, a high-profile default, or other factors. High yield
securities generally are less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used. Risks include potential loss to the fund due
to the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to
close out a position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities, which are securities with a limited trading market.
There is a possible risk that the securities cannot be readily sold or can
only be resold at a price significantly lower than their value.
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 SAI.
[Begin callout]
MS-3 Mutual Shares Securities Fund - Class 1
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
[Begin callout]
BEST
QUARTER:
Q4 '98
12.94%
WORST
QUARTER:
Q3 '98
- -17.65%
[End callout]
MUTUAL SHARES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Insert bar graph]
97 98
- --------------------
17.73% 0.09%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (11/08/96)
- ----------------------------------------------------------------------
MUTUAL SHARES SECURITIES FUND - CLASS 0.09% 9.70%
1(1)
S&P 500(R)INDEX(2) 28.58% 30.66%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The S&P 500(R)Index is an unmanaged
group of widely held common stocks covering a variety of industries. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
MANAGEMENT TEAM The team members primarily responsible for the fund's
management are:
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the fund
SENIOR VICE PRESIDENT since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for Heine
Securities Corporation, the predecessor of
Franklin Mutual (Heine).
DAVID E. MARCUS Mr. Marcus has been a manager of the fund
SENIOR VICE PRESIDENT since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for Heine.
Michael F. Price is Chairman of the Board of Directors which oversees the
management of Franklin Mutual. The managers listed above are part of a larger
team of investment professionals with management responsibility for all of
the funds managed by Franklin Mutual, including this fund. Peter A. Langerman
is Chief Executive Officer and Robert L. Friedman is Chief Investment Officer
of Franklin Mutual. Mr. Friedman has overall supervisory responsibility for
the day to day management of the funds managed by Franklin Mutual.
[Begin callout]
MS-4 Mutual Shares Securities Fund - Class 1
[End callout]
The team also includes:
PETER A. LANGERMAN Mr. Langerman has been involved
CHIEF EXECUTIVE OFFICER with the management of the fund
FRANKLIN MUTUAL since its President and
inception in 1996. Before
joining the Franklin Templeton
Group in 1996, he was a research
analyst for Heine.
ROBERT L. FRIEDMAN Mr. Friedman has been involved
CHIEF INVESTMENT OFFICER with the management of the fund
SENIOR VICE PRESIDENT since its inception in 1996.
FRANKLIN MUTUAL Before joining the Franklin
Templeton Group in 1996, he was
a research analyst for Heine.
JEFFREY A. ALTMAN Mr. Altman has been a manager of
SENIOR VICE PRESIDENT the fund since its inception in
FRANKLIN MUTUAL 1996. Before joining the
Franklin Templeton Group in
1996, he was a research analyst
for Heine.
RAYMOND GAREA Mr. Garea has been a manager of
SENIOR VICE PRESIDENT the fund since its inception in
FRANKLIN MUTUAL 1996. Before joining the
Franklin Templeton Group in
1996, he was a research analyst
for Heine.
DAVID J. WINTERS Mr. Winters has been a manager
SENIOR VICE PRESIDENT of the fund since 1998. Before
FRANKLIN MUTUAL joining the Franklin Templeton
Group in 1996, he was a research
analyst for Heine.
In addition, the following Franklin Mutual employees serve as
Assistant Portfolio Managers:
JIM AGAH Mr. Agah has been a manager of
ASSISTANT PORTFOLIO MANAGER the fund since 1998. Before
FRANKLIN MUTUAL joining the Franklin Templeton
Group in 1997, he was vice
president of equity sales at
Keefe, Bryette & Woods.
JEFF DIAMOND Mr. Diamond has been a manager
ASSISTANT PORTFOLIO MANAGER of the fund since 1998. Before
FRANKLIN MUTUAL joining the Franklin Templeton
Group in 1998, he was a vice
president and co-manager of
Prudential Conservative Stock
Fund.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.60% of its average daily net assets to the manager.
[Begin callout]
MS-5 Mutual Shares Securities Fund - Class 1
[End callout]
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ------------------ ---------------------------- ---------------- --------------- --------------- ----------------------- ----------
MUTUAL SHARES SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996(1) 10.00 .02 .33 .35 - - - 10.35
1997 10.35 .13 1.71 1.84 (.01) - (.01) 12.18
1998 12.18 .28 (.25) .03 (.13) (.12) (.25) 11.96
RATIOS/SUPPLEMENTAL DATA
RATIO OF
NET NET INVEST-
ASSETS, RATIO OF MENT INCOME
TOTAL END OF EXPENSES TO TO PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET AVERAGE NET TURNOVER
ENDED (%) (000'S) ($) ASSETS (%) ASSETS (%) RATE (%)
MUTUAL SHARES SECURITIES FUND
<C> <C> <C> <C> <C> <C>
1996(1) 3.50 27,677 1.00* 2.56* 1.31
1997 17.73 387,787 .80 2.10 49.01
1998 .09 482,444 .77 2.60 70.19
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
(1). For the period November 8, 1996 (effective date) to December 31, 1996.
[Begin callout]
MS-6 Mutual Shares Securities Fund - Class 1
[End callout]
TEMPLETON DEVELOPING MARKETS EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in emerging markets equity securities. Emerging
market equity securities generally include equity securities that trade in
emerging markets or are issued by companies that have their principal
activities in emerging market countries.
[Begin callout]
The fund invests primarily in the common stocks of companies located in
emerging market countries.
[End callout]
Emerging market countries generally include those considered to be emerging
by the World Bank, the International Finance Corporation, the United Nations,
or the countries' authorities. These countries are typically located in the
Asia-Pacific region, Eastern Europe, Central and South America, and Africa.
Emerging market equity securities and emerging market countries are more
fully described in the SAI.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stock, and securities convertible into common stock. The
fund also invests in American, European and Global Depositary Receipts, which
are certificates issued by a bank or trust company that give their holders
the right to receive securities issued by a foreign or domestic company.
In addition to its principal investments, the fund may invest significantly
in securities of issuers in developed market countries, and particularly
those developed market countries that are linked by tradition, economic
markets, geography or political events to emerging market countries.
Depending upon current market conditions, or for capital appreciation, the
fund may also invest a substantial portion of its assets in rated or unrated
debt securities of companies and governments located anywhere in the world. A
debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Common debt
securities are bonds, including bonds convertible into common stock or
unsecured bonds; notes; and short-term investments, including cash or cash
equivalents. The fund may also invest up to 10% of its total assets in
securities of closed-end investment companies to facilitate foreign
investment.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value- oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual companies and
securities, the fund may from time to time have significant investments in
particular countries. The manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing market and political conditions.
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 U.S. or non-U.S. currency
investments. Such investments may be medium-term (less than 5 years for this
fund) or short-term, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Begin callout]
TD-1 Templeton Developing Markets Equity Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, 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]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well diversified portfolio.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because that currency is
worth fewer U.S. dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with
longer maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TD-2 Templeton Developing Markets Equity Fund - Class 1
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Begin callout]
BEST
QUARTER:
Q4 '98
20.59%
WORST
QUARTER:
Q3 '97
- -23.44%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (03/15/94)
TEMPLETON DEVELOPMENT MARKETS
EQUITY FUND - CLASS 1(1) -21.61% -3.22%
MSCI EMERGING MARKETS FREE INDEX(2) -25.34% -8.80%
IFC INVESTABLE COMPOSITE INDEX(2) -22.01% -9.24%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The unmanaged MSCI Emerging Markets
Free Index measures the performance of securities located in 25 emerging
market countries such as Brazil, China, Korea and Poland. The International
Finance Corporation's Investable Composite Index is an emerging markets index
that includes 650 stocks from 18 countries including Mexico, South Korea,
Brazil, Jordan and Turkey. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Begin callout]
TD-3 Templeton Developing Markets Equity Fund - Class 1
[End callout]
[Insert graphic of briefcase] MANAGEMENT
Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower
One, Singapore, 038987, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
Dr. J. Mark Mobius Dr. Mobius has been a manager of the
MANAGING DIRECTOR, TAML fund since its inception in 1994, and
has been with the Franklin Templeton
Group since 1987.
Tom Wu Mr. Wu has been a manager of the fund
DIRECTOR, TAML since its inception in 1994, and has
been with the Franklin Templeton Group
since 1987.
H. Allan Lam Mr. Lam has been a manager of the fund
PORTFOLIO MANAGER, TAML since its inception in 1994, and has
been with the Franklin Templeton Group
since 1987.
Eddie Chow Mr. Chow has been a manager of the fund
PORTFOLIO MANAGER, TAML since 1996, and has been with the
Franklin Templeton Group since 1994.
Dennis Lim Mr. Lim has been a manager of the fund
DIRECTOR, TAML since 1996, and has been with the
Franklin Templeton Group since 1990.
Tek-Khoan Ong Mr. Ong has been a manager of the fund
PORTFOLIO MANAGER, TAML since 1996, and has been with the
Franklin Templeton Group since 1993.
The fund pays the manager a fee for managing its assets, making its
investment decisions and providing certain administrative facilities and
services to the fund. For the fiscal year ended December 31, 1998, the fund
paid 1.25% of its average daily net assets to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ------------- ----------------- ------------- ---------------- -------------------------------- ------------ ---------- ------------
TEMPLETON DEVELOPING MARKETS EQUITY FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994(1) 10.00 .07 (.51) (.44) - - - 9.56
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78
1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59
1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29
1998 10.29 .20 (2.35) (2.15) (.29) (.94) (1.23) 6.91
RATIOS/SUPPLEMENTAL DATA
NET
ASSETS, RATIO OF RATIO OF
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ------------- ----------------- ------------- ---------------- -------------------- ---------------
TEMPLETON DEVELOPING MARKETS EQUITY FUND
<C> <C> <C> <C> <C> <C>
1994(1) (4.40) 98,189 1.53* 1.85* 1.15
1995 2.77 158,084 1.41 2.01 19.96
1996 21.59 272,098 1.49 1.68 12.42
1997 (8.72) 279,680 1.42 1.57 20.59
1998 (21.61) 162,433 1.41 2.04 36.58
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
(1). For the period March 15, 1994 (effective date) to December 31, 1994.
[Begin callout]
TD-4 Templeton Developing Markets Equity Fund - Class 1
[End callout]
TEMPLETON GLOBAL ASSET ALLOCATION FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in
equity securities of companies in any nation, debt securities of companies
and governments of any nation, and in money market instruments. The mix of
investments will be adjusted to capitalize on total return potential produced
by changing economic conditions throughout the world, including emerging
market countries. While there are no minimum or maximum percentage targets
for each asset class, historically stocks have been the predominant
investment.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, securities convertible into common stock, and
American, European and Global Depositary Receipts. Depositary Receipts are
certificates issued by a bank or trust company that give their holders the
right to receive securities issued by a foreign or domestic company. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities
are bonds, including bonds convertible into common stock or unsecured bonds;
notes; and short-term investments, including cash or cash equivalents.
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four rating categories (AAA to BBB) by independent rating
agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors
Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to
be comparable. The fund may also invest up to 25% of its total assets in high
yield, medium and lower rated debt securities ("junk bonds"), or, if unrated,
determined by the fund's manager to be comparable. The fund will not invest
in defaulted securities. During 1998, about 10.2% of the fund's portfolio was
invested in lower rated and comparable quality unrated debt securities. Many
debt securities of non-U.S. issuers, and especially emerging market issuers,
are rated below investment grade or are unrated so that their selection
depends on the manager's internal analysis.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value- oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes
in interest rates, and credit risks. The manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions; with respect to debt
securities, the manager may also from time to time make use of forward
currency exchange contracts for hedging (protection) purposes (Hedging
Instruments).
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 U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Begin callout]
TA-1 Templeton Global Asset Allocation Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with foreign
market conditions and currencies, 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]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because the investment is
worth fewer dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with
longer maturities are more sensitive to these price changes.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to
encounter financial difficulties and be more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates.
If an issuer stops paying interest and/or principal, payments may never
resume. The fund may lose its entire investment on bonds that may be, or are,
in default.
[Begin callout]
TA-2 Templeton Global Asset Allocation Fund - Class 1
[End callout]
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, market activity, large
sustained sales, a high-profile default, or other factors. High yield
securities generally are less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used.
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, risks, and bond
ratings can be found in the SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[Begin callout]
BEST
QUARTER:
Q4 '98
11.93%
WORST
QUARTER:
Q3 '98
- -13.12
[End callout]
TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Insert bar graph]
96 97 98
- -----------------------------
19.84% 11.71% 0.04%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (05/01/95)
- ----------------------------------------------------------------------
TEMPLETON GLOBAL ASSET
ALLOCATION FUND - CLASS 1(1) -0.04% 10.25%
MSCI WORLD INDEX(2) 24.80% 18.24%
JP MORGAN GLOBAL GOVERNMENT BOND INDEX(2) 15.31% 7.49%
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R)Micropal. The unmanaged MSCI World Index(R)tracks
the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. The unmanaged JP Morgan
Global Government Bond Index tracks the performance of government bond
markets in 13 countries. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Begin callout]
TA-3 Templeton Global Asset Allocation Fund - Class 1
[End callout]
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas,
is the fund's investment manager.
Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through
its Templeton Global Bond Managers division (Global Bond Managers), is the
fund's sub-advisor.
MANAGEMENT TEAM The team responsible for managing the equity portion of the
fund is:
DALE WINNER, CFA Mr. Winner has been a manager of the
PORTFOLIO MANAGER, TGAL fund since 1997. Before joining Franklin
Templeton in 1995, he was a trust
officer at J.P. Morgan.
MARK G. HOLOWESKO, CFA Mr. Holowesko has been a manager of the
PRESIDENT, TGAL fund since 1999, and has been with the
Franklin Templeton Group since 1985.
A team from Global Bond Managers is responsible for managing the debt portion
of the fund's investments.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.65% of its average daily net assets to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ----------------------- -------------------- ------------ -------------- ---------------- ------------- ---------- ---------- ------
TEMPLETON GLOBAL ASSET ALLOCATION FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995(1) 10.00 .18 .52 .70 (.18) - (.18) 10.52
1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59
1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72
1998 13.72 .61 (.59) .02 (.49) (.58) (1.07) 12.67
RATIOS/SUPPLEMENTAL DATA
NET RATIO OF
ASSETS, RATIO OF NET INVEST-
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ----------------------- -------------------- ------------ -------------- ---------------- -------------
Templeton Global Asset Allocation Fund
<C> <C> <C> <C> <C> <C>
1995(1) 7.01 14,729 .90* 3.84* 30.00
1996 19.84 56,274 .86 4.21 52.35
1997 11.71 93,402 .94 4.22 61.93
1998 (.04) 81,670 .84 4.32 59.03
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
1. For the period April 19, 1995 (effctive date) to December 31, 1995.
[Begin callout]
TA-4 Templeton Global Asset Allocation Fund - Class 1
[End callout]
TEMPLETON GLOBAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. While
there are no set percentage targets, the fund generally invests in large- to
medium-cap companies with market capitalization values (share price times the
number of common stock shares outstanding) greater than $1.5 billion, but may
invest a small portion in small-cap companies which have more risk. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests
in American, European, and Global Depositary Receipts, which are certificates
issued by a bank or trust company that give their holders the right to
receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, to repay a loan of money at a future date and generally to pay
interest. Common debt securities are bonds, including bonds convertible into
common stocks or unsecured bonds; notes; and short-term investments,
including cash or cash equivalents.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value- oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
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 U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Begin callout]
TG-1 Templeton Global Growth Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because that currency is
worth fewer U.S. dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with
longer maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TG-2 Templeton Global Growth Fund - Class 1
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
[Begin callout]
BEST
QUARTER:
Q4 '95
16.30%
WORST
QUARTER:
Q3 '98
- -13.78%
[End callout]
TEMPLETON GLOBAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Insert bar graph]
95 96 97 98
- ------------------------------------
12.72% 21.28% 13.50% 8.98%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (03/15/94)
- ----------------------------------------------------------------------
TEMPLETON GLOBAL GROWTH FUND - CLASS 8.98% 12.30%
1(1)
MSCI ALL COUNTRY WORLD FREE(R)INDEX(2) 21.97% 14.79%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The unmanaged MSCI All Country World
Free(R)Index measures the performance of securities located in 48 countries,
including emerging markets in Latin America, Asia and Eastern Europe. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas,
is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
RICHARD SEAN FARRINGTON, CFA Mr. Farrington has been a manager
SENIOR VICE PRESIDENT, TGAL of the fund since 1995, and has
been with the Franklin Templeton
Group since 1990.
JEFFREY A. EVERETT, CFA Mr. Everett has been a manager of
EXECUTIVE VICE PRESIDENT, TGAL the fund since its inception in
1994, and has been with the
Franklin Templeton Group since
1990.
The fund pays the manager a fee for managing its assets, making its
investment decisions and providing certain administrative facilities and
services to the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.83% of its average daily net assets to the manager.
[Begin callout]
TG-3 Templeton Global Growth Fund - Class 1
[End callout]
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ----------------------- -------------------- ------------ -------------- ---------------- ------------- ---------- ---------- ------
TEMPLETON GLOBAL GROWTH FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994(1) 10.15 .07 .26 .33 - - - 10.48
1995 10.48 .16 1.17 1.33 (.06) - (.06) 11.75
1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80
1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34
1998 15.34 .35 .98 1.33 (.41) (1.49) (1.90) 14.77
RATIOS/SUPPLEMENTAL DATA
NET RATIO OF
ASSETS, RATIO OF NET INVEST-
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ----------------------- -------------------- ------------ -------------- ---------------- -------------
TEMPLETON GLOBAL GROWTH FUND
<C> <C> <C> <C> <C> <C>
1994(1) 3.25 158,856 1.14* 2.49* 7.14
1995 12.72 338,755 .97 2.46 30.92
1996 21.28 579,877 .93 2.20 12.32
1997 13.50 758,445 .88 2.49 24.81
1998 8.98 747,080 .88 2.27 32.30
</TABLE>
*Annualized
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower. Total return is not
annulized.
(1). For the period March 15, 1994 (effective date) to December 31, 1994.
[Begin callout]
TG-4 Templeton Global Growth Fund - Class 1
[End callout]
TEMPLETON GLOBAL INCOME SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high current income. Capital appreciation
is a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and
companies located anywhere in the world, including emerging markets. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities
are bonds, including bonds convertible into common stock or unsecured bonds;
notes; and short- term investments, including cash or cash equivalents.
[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four rating categories (AAA to BBB) by independent rating
agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors
Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to
be comparable. The fund may also invest up to 30% of its net assets in high
yield, lower rated debt securities ("junk bonds") that are rated at least B,
including emerging market debt, or if unrated, determined by the fund's
manager to be comparable. The fund will not purchase defaulted securities.
If, however, a security is downgraded in rating or goes into default, the
fund will not automatically sell the security. During 1998, about 20.2% of
the fund's portfolio was invested in lower rated and comparable quality
unrated debt securities.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The average maturity of
debt securities in the fund's portfolio is medium-term (about 5 to 15 years)
but will fluctuate depending on the manager's outlook on the country and
future interest rate changes.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. In considering these factors, a country's
changing market, economic, and political conditions, such as inflation rate,
growth prospects, global trade patterns, and government policies will be
evaluated. The manager intends to manage the fund's exposure to various
currencies, and may from time to time seek to hedge (protect) against
currency risk by using forward currency exchange contracts (Hedging
Instruments).
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 U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Begin callout]
TI-1 Templeton Global Income Securities Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
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 can gain value. In general, securities with
longer maturities are more sensitive to these price changes. A sub-category
of interest rate risk is reinvestment risk, which is the risk that interest
rates will be lower when the fund seeks to reinvest interest payments, or the
proceeds from a matured debt security, resulting in less income received by
the fund.
FOREIGN SECURITIES Securities of governments and companies located outside
the U.S. involve risks that can increase the potential for losses in the
fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because the investment is
worth fewer dollars. Currency markets are generally not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to
encounter financial difficulties and be more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates.
If an issuer stops paying interest and/or principal, payments may never
resume. The fund may lose its entire investment on bonds that may be, or are,
in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, market activity, large
sustained sales, a high-profile default, or other factors. High yield
securities generally are less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price.
[Begin callout]
TI-2 Templeton Global Income Securities Fund - Class 1
[End callout]
HEDGING INSTRUMENTS Hedging Instruments used by the fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used. Risks include potential loss to the fund due
to the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to
close out a position because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified under federal securities laws. As
such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.
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, risks, and bond
ratings can be found in the SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
[Begin callout]
BEST
QUARTER:
Q1 '93
5.33%
WORST
QUARTER
Q3 '92
- -4.84%
[End callout]
TEMPLETON GLOBAL INCOME SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Insert bar graph]
90 91 92 93 94 95 96 97 98
- ---------------------------------------------------------------
9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST PAST SINCE INCEPTION
1 YEAR 5 YEARS (01/24/89)
- -----------------------------------------------------------------
TEMPLETON GLOBAL INCOME
FUND - CLASS 1(1) 7.08% 5.56% 7.52%
JP MORGAN GLOBAL
GOVERNMENT BOND INDEX(2) 15.31% 8.00% 9.23%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The unmanaged JP Morgan Global
Government Bond Index tracks the performance of government bond markets in 13
countries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
[Begin callout]
TI-3 Templeton Global Income Securities Fund - Class 1
[End callout]
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through
its Templeton Global Bond Managers division (Global Bond Managers), is the
fund's sub-advisor. A team from Global Bond Managers provides Advisers with
investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.57% of its average daily net assets to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ----------------------- -------------------- ------------ -------------- --------------- ------------- ---------- ---------- -------
TEMPLETON GLOBAL INCOME SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19
1995 12.19 .29 1.47 1.76 (.49) - (.49) 13.46
1996 13.46 1.02 .17 1.19 (1.04) - (1.04) 13.61
1997 13.61 1.05 (.73) .32 (.96) - (.96) 12.97
1998 12.97 1.07 (.19) .88 (.98) - (.98) 12.87
RATIOS/SUPPLEMENTAL DATA
NET RATIO OF
ASSETS, RATIO OF NET INVEST-
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ----------------------- -------------------- ------------ -------------- ---------------- -------------
TEMPLETON GLOBAL INCOME SECURITIES FUND
<C> <C> <C> <C> <C> <C>
1994 (4.99) 254,311 .71 7.99 79.38
1995 14.68 243,194 .64 7.59 152.89
1996 9.56 221,722 .61 7.30 140.96
1997 2.55 185,016 .62 7.03 181.61
1998 7.08 150,941 .63 6.86 84.17
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower.
[Begin callout]
TI-4 Templeton Global Income Securities Fund - Class 1
[End callout]
TEMPLETON INTERNATIONAL EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities that trade in non-U.S.
markets, including emerging markets, and that are issued by companies that
have their principal activities outside the U.S. While there are no set
percentage targets, the fund generally invests in large- to medium-cap
companies with market capitalization values (share price times the number of
common stock shares outstanding) greater than $1.5 billion, but may invest a
small portion in small-cap companies which have more risk. Equities represent
ownership interests in individual companies and give shareholders a claim in
the company's earnings and assets. They include common and preferred stocks,
and securities convertible into common stock. The fund also invests in
American, European, and Global Depositary Receipts, which are certificates
issued by a bank or trust company that give their holders the right to
receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Common debt securities are bonds, including bonds convertible
into common stock or unsecured bonds; notes; and short-term investments,
including cash or cash equivalents.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value- oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
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 U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Begin callout]
TE-1 Templeton International Equity Fund - Class 1
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because that currency is
worth fewer U.S. dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, potentially causing
liquid securities to become illiquid, particularly in emerging market
countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with
longer maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TE-2 Templeton International Equity Fund - Class 1
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
[Begin callout]
BEST
QUARTER:
Q4 '93
13.64%
WORST
QUARTER
Q3 '98
- -16.86%
[End callout]
TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1
[Insert bar graph]
93 94 95 96 97 98
- -------------------------------------------
28.56% 0.87% 10.59% 22.98% 11.69% 5.56%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST PAST SINCE INCEPTION
1 YEAR 5 YEARS (01/27/92)
- ----------------------------------------------------------------------
TEMPLETON INTERNATIONAL EQUITY
FUND - CLASS 1(1) 5.56% 10.09% 10.75%
MSCI ALL COUNTRY WORLD
EX-U.S. FREE INDEX(2) 14.46% 7.87% 8.64%
(1). All fund performance assumes reinvestment of dividends and capital
gains.
(2). Source: Standard & Poor's(R)Micropal. The unmanaged MSCI All Country World
Ex-U.S. Free Index measures the performance of securities located in 48
countries, both developed and emerging markets, except the U.S. Indices
include reinvested dividends and/ or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
MANAGEMENT TEAM The team responsible for the fund's management is:
HOWARD J. LEONARD, CFA Mr. Leonard has been a manager of
EXECUTIVE VICE PRESIDENT, TICI the fund since 1997, and has been
with the Franklin Templeton Group
since 1989.
MARK R. BEVERIDGE, CFA Mr. Beveridge has been a manager
SENIOR VICE PRESIDENT, TICI of the fund since 1994, and has
been with the Franklin Templeton
Group since 1994
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.80% of its average daily net assets to the manager.
[Begin callout]
TE-3 Templeton International Equity Fund - Class 1
[End callout]
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of the fund's Class 1 shares since
inception. The table shows certain information on a single share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by PricewaterhouseCoopers
LLP, independent auditors. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE ($)
NET NET DISTRI- DISTRI-
ASSET NET REALIZED & TOTAL BUTIONS BUTIONS
VALUE, INVEST- UNREALIZED FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT GAINS INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END
ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD
- ----------------------- ----------------- ---------- -------------- ---------------- ------------- ---------- ---------- ----------
TEMPLETON INTERNATIONAL EQUITY FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 12.50 .19 (.07) .12 (.04) (.07) (.11) 12.51
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32
1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45
1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12
1998 16.12 .56 .42 .98 (.53) (1.05) (1.58) 15.52
RATIOS/SUPPLEMENTAL DATA
NET RATIO OF
ASSETS, RATIO OF NET INVEST-
TOTAL END OF EXPENSES TO MENT INCOME PORTFOLIO
PERIOD RETURN+ YEAR AVERAGE NET TO AVERAGE NET TURNOVER
ENDED (%) (000'S)($) ASSETS(%) ASSETS(%) RATE(%)
- ----------------------- -------------------- ------------ -------------- ---------------- -------------
TEMPLETON INTERNATIONAL EQUITY FUND
<C> <C> <C> <C> <C> <C>
1994 .87 785,124 .99 2.17 12.22
1995 10.59 850,117 .92 2.87 16.42
1996 22.98 1,108,099 .89 3.07 27.52
1997 11.69 1,161,430 .89 3.01 26.96
1998 5.56 955,900 .88 2.90 5.98
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the fund serves as an underlying investment. If
they had been included, total return would be lower.
[Begin callout]
TE-4 Templeton International Equity Fund - Class 1
[End callout]
[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
o YEAR 2000 PROBLEM The funds' business operations depend on 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 similar impact on the price of the funds' shares.
The funds' 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 replaced 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.
[Begin callout]
1 Additional Information, All Funds - Class 1
[End callout]
[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.
[Begin callout]
2 Additional Information, All Funds - Class 1
[End callout]
FUND ACCOUNT INFORMATION
[Insert graphic of paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts. The funds' Board monitors this to be sure
there are no material conflicts of interest between the two different types
of contract owners. 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 shareholder sells shares of the applicable fund to
make benefit or surrender payments or to execute exchanges (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 pointing in opposite directions] 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 fund exchanges that may be made (please see "Market Timers" below).
[Insert graphic of pen and notepad] 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' 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 shareholders 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.
STATEMENTS AND REPORTS Contract owners will receive confirmations and account
statements that show account transactions. Insurance company shareholders
will receive the fund's financial reports every six months. To reduce fund
expenses, if you need additional copies, please call 1-800/342-3863.
If there is a dealer or other investment representative of record on the
account, he or she will also receive confirmations, account statements and
other information about the contract owner's account directly from the
contract's administrator.
[Begin callout]
3 Templeton Variable Products Series Fund
[End callout]
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 reserves 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 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. Each
class is identical except that class 2 has a distribution plan or "rule
12b-1" plan which is described in prospectuses offering class 2 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 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at
1-800/342-3863. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
[Begin callout]
4 Templeton Variable Products Series Fund
[End callout]
FOR MORE INFORMATION
The funds of the Franklin Templeton Variable Insurance Products Trust (the
Trust), formerly Franklin Valuemark Funds, are only available as investment
options in variable annuity or variable life insurance contracts. Please
consult the accompanying contract prospectus for information about the terms
of an investment in a contract.
You can learn more about the fund 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(R)Templeton(R)
1-800/342-3863
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, D.C. 20549-0102. You can also visit the SEC's Internet site at
http://www.sec.gov.
PROSPECTUS
FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST
CLASS 2 SHARES
FRANKLIN CAPITAL GROWTH FUND (EFFECTIVE 12/15/99 THE FUND WILL BE NAMED THE
FRANKLIN LARGE CAP GROWTH SECURITIES FUND) FRANKLIN SMALL CAP FUND MUTUAL SHARES
SECURITIES FUND TEMPLETON DEVELOPING MARKETS EQUITY FUND TEMPLETON GLOBAL ASSET
ALLOCATION FUND TEMPLETON GLOBAL GROWTH FUND TEMPLETON GLOBAL INCOME SECURITIES
FUND TEMPLETON INTERNATIONAL EQUITY FUND
May 1, 1999
as supplemented December 1, 1999
(Insert Franklin Templeton Ben Head)
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
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
[Begin callout]
INFORMATION ABOUT EACH FUND
YOU SHOULD KNOW BEFORE
INVESTING
[End callout]
i Overview
INDIVIDUAL FUND DESCRIPTIONS
FC-1 Franklin Capital Growth Fund
(EFFECTIVE 12/15/99, THE FUND WILL BE NAMED THE
FRANKLIN LARGE CAP GROWTH SECURITIES FUND)
FS-1 Franklin Small Cap Fund
MS-1 Mutual Shares Securities Fund
TD-1 Templeton Developing Markets Equity Fund
TA-1 Templeton Global Asset Allocation Fund
TG-1 Templeton Global Growth Fund
TI-1 Templeton Global Income Securities Fund
TE-1 Templeton International Equity Fund
ADDITIONAL INFORMATION, ALL FUNDS
1 Important Recent Developments
2 Distributions and Taxes
FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND
ACCOUNT TRANSACTIONS
AND SERVICES
[End callout]
3 Buying Shares
3 Selling Shares
3 Exchanging Shares
3 Fund Account Policies
4 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT
EACH FUND
[End callout]
Back Cover
Franklin Templeton Variable Insurance Products Trust
[INSERT GRAPHIC OF GLOBE] OVERVIEW
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (THE TRUST), FORMERLY
FRANKLIN VALUEMARK FUNDS, CURRENTLY CONSISTS OF TWENTY-SIX SEPARATE FUNDS,
OFFERING A WIDE VARIETY OF INVESTMENT CHOICES. EACH FUND HAS TWO CLASSES OF
SHARES, CLASS 1 AND CLASS 2. THE FUNDS ARE ONLY AVAILABLE AS INVESTMENT OPTIONS
IN VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS. THE ACCOMPANYING
CONTRACT PROSPECTUS 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.
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 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 investments goals.
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
The funds' investment managers and their affiliates manage over $218 billion in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Today, Franklin Templeton is
one of the largest mutual fund organizations in the United States, and offers
money management expertise spanning a variety of investment objectives.
[Begin callout]
i
[End callout]
Franklin Capital Growth Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
Effective December 15, 1999, the fund's name will be changed to Franklin Large
Cap Growth Securities Fund and the fund's strategy will be restated to one of
investing, under normal market conditions, at least 65% of its total assets in
equity securities of U.S. large-cap growth companies ($8.5 billion or more),
focusing on those companies that are expected to have revenue growth in excess
of the economy as a whole either through above-average industry expansion or
market share gains. These companies generally dominate, or are gaining market
share, in their respective industries and have a reputation for quality of
management, as well as superior products and services.
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies believed to be
globally competitive and to offer favorable opportunities for long-term capital
appreciation. Following this policy, the fund will typically invest
predominantly in established, large- to medium-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities convertible
into common stock.
[Begin callout]
The fund invests primarily in large cap growth companies' equity securities.
[End callout]
PORTFOLIO SELECTION In choosing equity investments, the manager will focus on
companies that have exhibited above average growth, strong financial records,
and large market capitalization. In addition, management expertise, industry
leadership, growth in market share and sustainable competitive advantage are
factors the manager also considers. Although the manager will search for
investments across a large number of industries, it expects to have significant
positions (but not in excess of 25% of its total assets in a given sector) in
the technology (including computers, telecommunications, and electronics),
health care, and finance industries.
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.
[Begin callout]
FC-1 Franklin Capital Growth Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Growth stock prices reflect projections of
future earnings or revenues, and can, therefore, fall dramatically if the
company fails to meet those projections.
[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]
TECHNOLOGY COMPANIES The technology sector has historically been volatile due to
the rapid pace of product change and development within the sector. The stock
prices of companies operating within this sector may be subject to abrupt or
erratic movements. In addition, the activities of telecommunications companies
fall under international, federal and state regulations. These companies may be
adversely affected by changes in government regulations.
HEALTH CARE COMPANIES The activities of health care companies may be funded or
subsidized by federal and state governments. If government funding and subsidies
are reduced or discontinued, the profitability of these companies could be
adversely affected. Health care companies may also be affected by government
policies on health care reimbursements, regulatory approval for new drugs and
medical instruments, and similar matters. They are also subject to legislative
risk, i.e., the risk of a reform of the health care system through legislation.
FINANCIAL SERVICES COMPANIES Financial services companies are subject to
extensive government regulation which tends to limit both the amount and types
of loans and other financial commitments such companies can make, and the
interest rates and fees they can charge. These limitations can have a
significant impact on the profitability of a financial services company since
profitability is impacted by the company's ability to make financial commitments
such as loans.
The financial services industry is currently undergoing a number of changes such
as continuing consolidations, development of new products and structures and
changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry.
See "Important Recent Developments," in this prospectus for Year 2000
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 SAI.
[Begin callout]
FC-2 Franklin Capital Growth Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
FRANKLIN CAPITAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
18.31% 20.29%
- ------------------
97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '98
19.73%
WORST
QUARTER
Q3 '98
- -10.47%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
PAST 1 YEAR (05/01/96)
- -------------------------------------------------------------------
Franklin Capital Growth Fund - Class 1(1) 20.29% 19.72%
S&P 500(R)(2) Index 28.58% 29.00%
Russell 1000 Index(R)(2) 27.02% 27.92%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The Russell
1000 Index measures the 1,000 largest companies in the Russell 3000 Index.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California, 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
KENT SHEPHERD, CFA
VICE PRESIDENT, ADVISERS
Mr. Shepherd has been a manager of the fund since April 1999, and has been
with the Franklin Templeton Group since 1991.
JASON R. NUNN
PORTFOLIO MANAGER, ADVISERS
Mr. Nunn has been a manager of the fund since September 1999. Before joining
the Franklin Templeton Group in 1998 he worked in corporate finance with
Alex. Brown & Sons.
CONRAD B. HERRMANN, CFA
SENIOR VICE PRESIDENT, ADVISERS
Mr. Herrmann has been a manager of the fund since its inception in 1996, and
has been with the Franklin Templeton Group since 1989.
The fund pays the manager a fee for managing its assets, making its investment
decisions, and providing certain administrative facilities and services for the
fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its
average daily net assets to the manager.
[Begin callout]
FC-3 Franklin Capital Growth Fund - Class 2
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
Franklin Small Cap Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) growth companies. Small cap companies are generally
those with market cap values (share price times the number of common stock
shares outstanding) of less than $1.5 billion, at the time of purchase. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "growth at a reasonable price" strategy. As a "bottom-up"
investor focusing primarily on individual securities, the manager chooses small
cap companies that it believes are positioned for rapid growth in revenues,
earnings or assets, and are selling at reasonable prices. The manager relies on
a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing or
product niche, proven technology, and industry leadership are all factors the
manager believes point to strong long-term growth potential. The manager
diversifies the fund's assets across many industries, and from time to time may
invest substantially in certain sectors, including technology and biotechnology.
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 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Growth stock prices reflect projections of
future earnings or revenues, and can, therefore, fall dramatically if the
company fails to meet those projections.
[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]
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, smaller company securities have been more volatile in price
and have fluctuated independently from larger company securities, especially
over the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, and their growth prospects are less
certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies may also suffer significant losses, their securities
can be less liquid, and investments in these companies may be speculative.
Technology and biotechnology industry stocks, in particular, can be subject to
erratic or abrupt price movements.
See "Important Recent Developments" in this prospectus for Year 2000 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 SAI.
[Begin callout]
FS-1 Franklin Small Cap Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
FRANKLIN SMALL CAP FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
28.95% 17.42% -0.98%
- ---------------------------
96 97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '98
24.39%
WORST
QUARTER
Q3 '98
- -24.40%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
PAST 1 YEAR (05/01/96)
- ----------------------------------------------------------------
Franklin Small Cap Fund - Class 1(1) 20.29% 19.72%
S&P 500(R)(2) Index 28.58% 29.00%
Russell 1000 Index(R)(2) 27.02% 27.92%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The Russell
1000 Index measures the 1,000 largest companies in the Russell 3000 Index.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
[Begin callout]
FS-2 Franklin Small Cap Fund - Class 2
[End callout]
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California, 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
EDWARD B. JAMIESON
EXECUTIVE VICE PRESIDENT, ADVISERS
Mr. Jamieson has been a manager of the fund since its inception in 1995, and
has been with the Franklin Templeton Group since 1987.
MICHAEL MCCARTHY
VICE PRESIDENT, ADVISERS
Mr. McCarthy has been a manager of the fund since its inception in 1995. He
joined the Franklin Templeton Group in 1992.
AIDAN O'CONNELL
PORTFOLIO MANAGER, ADVISERS
Mr. O'Connell has been a manager of the fund since September 1998. Before
joining Franklin Templeton in May 1998, Mr. O'Connell was a research analyst
and a corporate financial analyst at Hambrecht & Quist.
The fund pays the manager a fee for managing its assets, making its investment
decisions, and providing certain administrative facilities and services for the
fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its
average daily net assets to the manager.
[Begin callout]
FS-3 Franklin Small Cap Fund - Class 2
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
Mutual Shares Securities Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's principal goal is capital appreciation. Its secondary goal is
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies that the manager
believes are available at market prices less than their actual value based on
certain recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund will primarily invest in:
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
o UNDERVALUED STOCKS Stocks trading at a discount to asset value.
o REORGANIZING COMPANIES Securities of companies in the midst of change such as
mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers or
likely to receive such offers (Reorganizing Companies). The fund may
participate in such transactions.
o DISTRESSED COMPANIES Securities of companies that are distressed or even
in bankruptcy.
The fund invests primarily in companies with market capitalization values (share
price times the number of common stock shares outstanding) greater than $1.5
billion, but may invest a small portion in small-cap companies, which have more
risk. Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include common
and preferred stocks, and securities convertible into common stock.
While the fund generally purchases securities for investment purposes, the
manager may use the fund's ownership in a company to seek to influence or
control management, or invest in other companies that do so, when the manager
believes the fund may benefit.
The fund may invest in debt securities rated in any rating category established
by an independent rating agency, including high yield, lower rated or defaulted
debt securities ("junk bonds"), or if unrated, determined by the manager to be
comparable. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Common
debt securities are bonds, including bonds convertible into common stock or
unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.
The fund typically invests in unrated and lower rated debt securities of
Reorganizing Companies or Distressed Companies. Such debt securities are
primarily secured or unsecured indebtedness or participations in the
indebtedness, including loan participations and trade claims. Indebtedness
represents a specific commercial loan or portion of a loan which has been given
to a company by a financial institution such as a bank or insurance company. By
purchasing direct indebtedness of companies, a fund steps into the shoes of a
financial institution. Participation interests in indebtedness represent
fractional interests in a company's indebtedness.
The fund currently intends to invest up to approximately 20% of its total assets
in foreign equity and debt securities, including American, European and Global
Depositary Receipts. Depositary receipts are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company. The fund generally seeks to hedge
(protect) against currency risks, largely using forward foreign currency
exchange contracts, where available, and in the manager's opinion, it is
economical to do so (Hedging Instruments).
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value strategy. In choosing equity investments, the
manager focuses on the market price of a company's securities relative to its
evaluation of the company's asset value, including an analysis of book value,
cash flow potential, long-term earnings, and multiples of earnings of comparable
securities. Similarly, debt securities are generally selected based on the
manager's own analysis of the security's intrinsic value rather than the coupon
rate or rating. Thus, each security is examined separately and there are no set
criteria as to asset size, earnings or industry type.
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 U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
[Begin callout]
MS-1 Mutual Shares Securities Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
[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]
REORGANIZING OR DISTRESSED COMPANIES The fund's bargain-driven focus may result
in the fund choosing securities that are not widely followed by other investors,
including companies reporting poor earnings, companies whose share prices have
declined sharply, turnarounds, cyclical companies, or companies emerging from
bankruptcy, which may have higher risk. There can be no assurance that any
merger or other restructuring, or tender or exchange offer proposed at the time
the fund invests in a Reorganizing Company will be completed on the terms
contemplated and therefore, benefit the fund.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency by
a country's government, will increase or decrease the fund's returns from its
foreign portfolio holdings. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country. The political, economic, and social structures of some
countries the fund invests in may be less stable and more volatile than those in
the U.S. The risks of investing in these countries include the possibility of
currency devaluations by a country's government or banking authority, the
imposition of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
punitive taxes and certain custody and settlement risks. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial reporting
standards and practices as U.S. companies and their securities may not be as
liquid as securities of similar U.S. companies, or may become illiquid. Non-U.S.
stock exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
INDEBTEDNESS AND PARTICIPATIONS The purchase of debt securities of Reorganizing
or Distressed Companies always involves a risk as to the creditworthiness of the
issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness, making them less liquid than other
securities, and purchasers of participations, such as the fund, must rely on the
financial institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness. In addition, the fund
takes on the risk as to the creditworthiness of the bank or other financial
intermediary issuer, as well as of the issuer of the underlying indebtedness.
LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield debt
securities are not as strong financially, and are more likely to encounter
financial difficulties and be more vulnerable to changes in the economy, such as
a recession or a sustained period of rising interest rates. If an issuer stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, market activity, large sustained sales, a
high-profile default, or other factors. High yield securities generally are less
liquid than higher-quality bonds, and infrequent trades can make accurate
pricing more difficult. At times, it may be difficult to sell these securities
promptly at an acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used. Risks include potential loss to the fund due to
the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to close
out a position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. There is a
possible risk that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value.
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 SAI.
[Begin callout]
MS-3 Mutual Shares Securities Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
MUTUAL SHARES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURN (1)
[Insert bar graph]
17.73% 0.09%
- ----------------
97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '98
12.94%
WORST
QUARTER
Q3 '98
- -17.65%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
PAST 1 YEAR (11/08/96)
- --------------------------------------------------------------------
Mutual Shares Securities Fund - Class 1(1) 0.09% 9.70%
S&P 500(R)(2) Index 28.58% 30.66%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
MANAGEMENT TEAM The team members primarily responsible for the fund's management
are:
LAWRENCE N. SONDIKE
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Sondike has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine Securities Corporation, the predecessor of Franklin Mutual (Heine).
DAVID E. MARCUS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Marcus has been a manager of the fund since its inception in 1996. Before
joining Franklin Templeton Group in 1996, he was a research analyst for Heine.
Michael F. Price is Chairman of the Board of Directors which oversees the
management of Franklin Mutual. The managers listed above are part of a larger
team of investment professionals with management responsibility for all of
the funds managed by Franklin Mutual, including this fund. Peter A. Langerman
is
Chief Executive Officer and Robert L. Friedman is Chief Investment Officer of
Franklin Mutual. Mr. Friedman has overall supervisory responsibility for the
day to day management of the funds managed by Franklin Mutual.
[Begin callout]
MS-4 Mutual Shares Securities Fund - Class 2
[End callout]
The team also includes:
PETER A. LANGERMAN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FRANKLIN MUTUAL
Mr. Langerman has been involved with the management of the fund
since its inception in 1996. Before joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine.
ROBERT L. FRIEDMAN
CHIEF INVESTMENT OFFICER
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Friedman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.
JEFFREY A. ALTMAN
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Altman has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.
RAYMOND GAREA
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Garea has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.
DAVID J. WINTERS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL
Mr. Winters has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1996, he was a research analyst for Heine.
In addition, the following Franklin Mutual employees serve as Assistant
Portfolio Managers:
JIM AGAH
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL
Mr. Agah has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1997, he was vice president of equity sales at
Keefe, Bryette & Woods.
JEFF DIAMOND
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL
Mr. Diamond has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1998, he was a vice president and co-manager of
Prudential Conservative Stock Fund.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund paid
0.60% of its average daily net assets to the manager.
[Begin callout]
MS-5 Mutual Shares Securities Fund - Class 2
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
Templeton Developing Markets Equity Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in emerging markets equity securities. Emerging
market equity securities generally include equity securities that trade in
emerging markets or are issued by companies that have their principal activities
in emerging market countries.
[Begin callout]
The fund invests primarily in the common stocks of companies located in emerging
market countries.
[End callout]
Emerging market countries generally include those considered to be emerging by
the World Bank, the International Finance Corporation, the United Nations, or
the countries' authorities. These countries are typically located in the
Asia-Pacific region, Eastern Europe, Central and South America, and Africa.
EMERGING MARKET EQUITY SECURITIES AND EMERGING MARKET COUNTRIES ARE MORE FULLY
DESCRIBED IN THE SAI.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include common
and preferred stock, and securities convertible into common stock. The fund also
invests in American, European and Global Depositary Receipts, which are
certificates issued by a bank or trust company that give their holders the right
to receive securities issued by a foreign or domestic company.
In addition to its principal investments, the fund may invest significantly in
securities of issuers in developed market countries, and particularly those
developed market countries that are linked by tradition, economic markets,
geography or political events to emerging market countries.
Depending upon current market conditions, or for capital appreciation, the fund
may also invest a substantial portion of its assets in rated or unrated debt
securities of companies and governments located anywhere in the world. A debt
security obligates the issuer to the bondholders, both to repay a loan of money
at a future date and generally to pay interest. Common debt securities are
bonds, including bonds convertible into common stock or unsecured bonds; notes;
and short-term investments, including cash or cash equivalents. The fund may
also invest up to 10% of its total assets in securities of closed-end investment
companies to facilitate foreign investment.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing investments, the fund's manager will focus
on the market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A company's
historical value measures, including price/earnings ratio, profit margins and
liquidation value, will also be considered. As a "bottom-up" investor focusing
primarily on individual companies and securities, the fund may from time to time
have significant investments in particular countries. The manager intends to
manage the fund's exposure to various geographic regions and their currencies
based on its assessment of changing market and political conditions.
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 U.S. or non-U.S. currency investments.
Such investments may be medium-term (less than 5 years for this fund) or
short-term, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
[Begin callout]
TD-1 Templeton Developing Markets Equity Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, 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]
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. EMERGING MARKETS IN PARTICULAR CAN EXPERIENCE
SIGNIFICANT PRICE VOLATILITY IN ANY GIVEN YEAR, AND EVEN DAILY. The fund should
be thought of as a long-term investment for the aggressive portion of a well
diversified portfolio.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer U.S.
dollars. Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TD-2 Templeton Developing Markets Equity Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[INSERT BAR GRAPH]
2.77% 21.59% -8.72% -21.61%
- ----------------------------------
95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
20.59%
WORST
QUARTER:
Q3 '97
- -23.44%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (03/15/94)
- ---------------------------------------------------------------
Templeton Developing Markets
Equity Fund - Class 1(1) -21.61% -3.22%
MSCI Emerging Markets Free Index(2) -25.34% -8.80%
IFC Investable Composite Index(2) -22.01% -9.24%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Emerging Markets
Free Index measures the performance of securities located in 25 emerging market
countries such as Brazil, China, Korea and Poland. The International Finance
Corporation's Investable Composite Index is an emerging markets index that
includes 650 stocks from 18 countries including Mexico, South Korea, Brazil,
Jordan and Turkey. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
[Begin callout]
TD-3 Templeton Developing Markets Equity Fund - Class 2
[End callout]
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower
One, Singapore, 038987, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
DR. J. MARK MOBIUS
MANAGING DIRECTOR, TAML
Dr. Mobius has been a manager of the fund since its inception in 1994, and
has been with the Franklin Templeton Group since 1987.
TOM WU
DIRECTOR, TAML
Mr. Wu has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.
H. ALLAN LAM
PORTFOLIO MANAGER, TAML
Mr. Lam has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.
EDDIE CHOW
PORTFOLIO MANAGER, TAML
Mr. Chow has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1994.
DENNIS LIM
DIRECTOR, TAML
Mr. Lim has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1990.
TEK-KHOAN ONG
PORTFOLIO MANAGER, TAML
Mr. Ong has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1993.
The fund pays the manager a fee for managing its assets, making its investment
decisions and providing certain administrative facilities and services to the
fund. For the fiscal year ended December 31, 1998, the fund paid 1.25% of its
average daily net assets to the manager.
[Begin callout]
TD-4 Templeton Developing Markets Equity Fund - Class 2
[End callout]
Templeton Global Asset Allocation Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in
equity securities of companies in any nation, debt securities of companies and
governments of any nation, and in money market instruments. The mix of
investments will be adjusted to capitalize on total return potential produced by
changing economic conditions throughout the world, including emerging market
countries. While there are no minimum or maximum percentage targets for each
asset class, historically stocks have been the predominant investment.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include common
and preferred stocks, securities convertible into common stock, and American,
European and Global Depositary Receipts. Depositary Receipts are certificates
issued by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. A debt security obligates
the issuer to the bondholders, both to repay a loan of money at a future date
and generally to pay interest. Common debt securities are bonds, including bonds
convertible into common stock or unsecured bonds; notes; and short-term
investments, including cash or cash equivalents.
The fund focuses on "investment grade" debt securities. These are issues rated
in the top four rating categories (AAA to BBB) by independent rating agencies
such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable. The
fund may also invest up to 25% of its total assets in high yield, medium and
lower rated debt securities ("junk bonds"), or, if unrated, determined by the
fund's manager to be comparable. The fund will not invest in defaulted
securities. During 1998, about 10.2% of the fund's portfolio was invested in
lower rated and comparable quality unrated debt securities. Many debt securities
of non-U.S. issuers, and especially emerging market issuers, are rated below
investment grade or are unrated so that their selection depends on the manager's
internal analysis.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's long-term earnings, asset value and cash flow potential. A
company's historical value measures, including price/earnings ratio, profit
margins, and liquidation value, will also be considered. As a "bottom-up"
investor focusing primarily on individual securities, the fund may from time to
time have significant investments in particular countries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. The manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions; with respect to debt
securities, the manager may also from time to time make use of forward currency
exchange contracts for hedging (protection) purposes (Hedging Instruments).
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 U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
[Begin callout]
TA-1 Templeton Global Asset Allocation Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with foreign
market conditions and currencies, 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]
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because the investment is worth fewer
dollars. Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
Lower-rated securities Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield debt
securities are not as strong financially, and are more likely to encounter
financial difficulties and be more vulnerable to changes in the economy, such as
a recession or a sustained period of rising interest rates. If an issuer stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, market activity, large sustained sales, a
high-profile default, or other factors. High yield securities generally are less
liquid than higher-quality bonds, and infrequent trades can make accurate
pricing more difficult. At times, it may be difficult to sell these securities
promptly at an acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used.
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, risks, and bond ratings
can be found in the SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
19.84% 11.71% -0.04%
- --------------------------
96 97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '98
11.93%
WORST
QUARTER
Q3 '98
- -13.12%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
PAST 1 YEAR (05/01/95)
- -------------------------------------------------------------------
Templeton Global Asset Allocation Fund -
Class 1(1) -0.04% 10.25%
MSCI World Index(R)(2) 24.80% 18.24%
JP Morgan Global Government
Bond Index(2) 15.31% 7.49%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index(R)
tracks the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. The unmanaged JP Morgan
Global Government Bond Index tracks the performance of government bond markets
in 13 countries. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
[Begin callout]
TA-3 Templeton Global Asset Allocation Fund - Class 2
[End callout]
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is
the fund's investment manager.
Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI), Broward
Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor.
MANAGEMENT TEAM The team responsible for managing the equity portion of the fund
is:
DALE WINNER, CFA
PORTFOLIO MANAGER, TGAL
Mr. Winner has been a manager of the fund since 1997. Before joining Franklin
Templeton in 1995, he was a trust officer at J.P. Morgan.
MARK G. HOLOWESKO, CFA
PRESIDENT, TGAL
Mr. Holowesko has been a manager of the fund since 1999, and has been with
Franklin Templeton Group since 1985.
A team from Global Bond Managers is responsible for managing the debt portion of
the fund's investments.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund paid
0.65% of its average daily net assets to the manager.
[Begin callout]
TA-4 Templeton Global Asset Allocation Fund - Class 2
[End callout]
Templeton Global Growth Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. While there
are no set percentage targets, the fund generally invests in large- to
medium-cap companies with market capitalization values (share price times the
number of common stock shares outstanding) greater than $1.5 billion, but may
invest a small portion in small-cap companies which have more risk. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests in
American, European, and Global Depositary Receipts, which are certificates
issued by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the bondholders,
to repay a loan of money at a future date and generally to pay interest. Common
debt securities are bonds, including bonds convertible into common stocks or
unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing investments, the fund's manager will focus
on the market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A company's
historical value measures, including price/earnings ratio, profit margins and
liquidation value, will also be considered. As a "bottom-up" investor focusing
primarily on individual securities, the fund may from time to time have
significant investments in particular countries. The manager intends to manage
the fund's exposure to various geographic regions and their currencies based on
its assessment of changing market and political conditions.
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 U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
[Begin callout]
TG-1 Templeton Global Growth Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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]
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer U.S.
dollars. Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TG-2 Templeton Global Growth Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
12.72% 21.28% 13.50% 8.98%
- ---------------------------------
95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '95
16.30%
WORST
QUARTER
Q3 '98
- -13.78%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST SINCE INCEPTION
1 YEAR (03/15/94)
- ----------------------------------------------------------------------
TEMPLETON GLOBAL GROWTH FUND - CLASS 1(1) 8.98% 12.30%
MSCI ALL COUNTRY WORLD FREE(R) INDEX(2) 21.97% 14.79%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World
Free(R) Index measures the performance of securities located in 48 countries,
including emerging markets in Latin America, Asia and Eastern Europe. Indices
include reinvested dividends and/or interest. One cannot invest directly in an
index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is
the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
RICHARD SEAN FARRINGTON, CFA
SENIOR VICE PRESIDENT, TGAL
Mr. Farrington has been a manager of the fund since 1995, and has been with
the Franklin Templeton Group since 1990.
JEFFREY A. EVERETT, CFA
EXECUTIVE VICE PRESIDENT, TGAL
Mr. Everett has been a manager of the fund since its inception in 1994, and
has been with the Franklin Templeton Group since 1990.
The fund pays the manager a fee for managing its assets, making its investment
decisions and providing certain administrative facilities and services to the
fund. For the fiscal year ended December 31, 1998, the fund paid 0.83% of its
average daily net assets to the manager.
[Begin callout]
TG-3 Templeton Global Growth Fund - Class 2
[End callout]
THIS PAGE INTENTIONALLY LEFT BLANK
Templeton Global Income Securities Fund
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is high current income. Capital appreciation is
a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and companies
located anywhere in the world, including emerging markets. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are bonds,
including bonds convertible into common stock or unsecured bonds; notes; and
short-term investments, including cash or cash equivalents.
[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]
The fund focuses on "investment grade" debt securities. These are issues rated
in the top four rating categories (AAA to BBB) by independent rating agencies
such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable. The
fund may also invest up to 30% of its net assets in high yield, lower rated debt
securities ("junk bonds") that are rated at least B, including emerging market
debt, or if unrated, determined by the fund's manager to be comparable. The fund
will not purchase defaulted securities. If, however, a security is downgraded in
rating or goes into default, the fund will not automatically sell the security.
During 1998, about 20.2% of the fund's portfolio was invested in lower rated and
comparable quality unrated debt securities.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their selection
depends on the manager's internal analysis. The average maturity of debt
securities in the fund's portfolio is medium-term (about 5 to 15 years) but will
fluctuate depending on the manager's outlook on the country and future interest
rate changes.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in interest
rates, and credit risks. In considering these factors, a country's changing
market, economic, and political conditions, such as inflation rate, growth
prospects, global trade patterns, and government policies will be evaluated. The
manager intends to manage the fund's exposure to various currencies, and may
from time to time seek to hedge (protect) against currency risk by using forward
currency exchange contracts (Hedging Instruments).
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 U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
[Begin callout]
TI-1 Templeton Global Income Securities Fund - Class 2
[End callout]
[Insert graphic of chart with line going up and down]MAIN RISKS
- -------------------------------------------------------------------------------
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes. A sub-category of interest
rate risk is reinvestment risk, which is the risk that interest rates will be
lower when the fund seeks to reinvest interest payments, or the proceeds from a
matured debt security, resulting in less income received by the fund.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall and
so too will the fund's share price. This means you could lose money.
[End callout]
FOREIGN SECURITIES Securities of governments and companies located outside the
U.S. involve risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because the investment is worth fewer
dollars. Currency markets are generally not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
CREDIT This 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 the security's value and, thus, impact the value of fund shares.
LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield debt
securities are not as strong financially, and are more likely to encounter
financial difficulties and be more vulnerable to changes in the economy, such as
a recession or a sustained period of rising interest rates. If an issuer stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, market activity, large sustained sales, a
high-profile default, or other factors. High yield securities generally are less
liquid than higher-quality bonds, and infrequent trades can make accurate
pricing more difficult. At times, it may be difficult to sell these securities
promptly at an acceptable price.
[Begin callout]
TI-2 Templeton Global Income Securities Fund - Class 2
[End callout]
HEDGING INSTRUMENTS Hedging Instruments used by the fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used. Risks include potential loss to the fund due to
the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to close
out a position because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified under federal securities laws. As
such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk and country allocations at desired levels, as well as bond maturities,
may cause the fund's portfolio turnover rate to be high. High turnover generally
increases the fund's transaction costs.
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, risks, and bond ratings
can be found in the SAI.
[Begin callout]
TI-3 Templeton Global Income Securities Fund - Class 2
[End callout]
[Insert graphic of bull and bear] PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL INCOME SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08%
- --------------------------------------------------------------------
90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER
Q1 '93
5.33%
WORST
QUARTER
Q3 '92
- -4.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST PAST SINCE INCEPTION
1 YEAR 5 YEARS (01/24/89)
- -----------------------------------------------------------------------
Templeton Global Income
Securities Fund - Class 1(1) 7.08% 5.56% 7.52%
JP Morgan Global
Government Bond Index(2) 15.31% 8.09% 9.23%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Global
Government Bond Index tracks the performance of government bond markets in 13
countries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through
its Templeton Global Bond Managers division (Global Bond Managers), is the
fund's sub-advisor. A team from Global Bond Managers provides Advisers with
investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing its assets, making its investment
decisions, and providing certain administrative facilities and services for the
fund. For the fiscal year ended December 31, 1998, the fund paid 0.57% of its
average daily net assets to the manager.
[Begin callout]
TI-4 Templeton Global Income Securities Fund - Class 2
[End callout]
TEMPLETON INTERNATIONAL EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities that trade in non-U.S.
markets, including emerging markets, and that are issued by companies that have
their principal activities outside the U.S. While there are no set percentage
targets, the fund generally invests in large- to medium-cap companies with
market capitalization values (share price times the number of common stock
shares outstanding) greater than $1.5 billion, but may invest a small portion in
small-cap companies which have more risk. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities convertible
into common stock. The fund also invests in American, European, and Global
Depositary Receipts, which are certificates issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or
domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the bondholders,
both to repay a loan of money at a future date and generally to pay interest.
Common debt securities are bonds, including bonds convertible into common stock
or unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's long-term earnings, asset value and cash flow potential. A
company's historical value measures, including price/earnings ratio, profit
margins and liquidation value, will also be considered. As a "bottom-up"
investor focusing primarily on individual securities, the fund may from time to
time have significant investments in particular countries. The manager intends
to manage the fund's exposure to various geographic regions and their currencies
based on its assessment of changing market and political conditions.
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 U.S. or non-U.S. currency 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 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 short term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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.
[Begin callout]
TE-1 Templeton International Equity Fund - Class 2
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer U.S.
dollars. Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
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 can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This 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 the debt security's value and, thus, impact the value of fund shares.
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 SAI.
[Begin callout]
TE-2 Templeton International Equity Fund - Class 2
[End callout]
[Insert graphic of bull and bear]PAST PERFORMANCE
- -------------------------------------------------------------------------------
Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns for each full calendar year over the past ten years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities index. Of course, past
performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS (1)
[Insert bar graph]
28.56% 0.87% 10.59% 22.98% 11.69% 5.56%
- -------------------------------------------------
93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER
Q4 '93
13.64%
WORST
QUARTER
Q3 '98
- -16.86%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST PAST SINCE INCEPTION
1 YEAR 5 YEARS (01/27/92)
- ---------------------------------------------------------------------
Templeton International Equity
Fund - Class 1(1) 5.56% 10.09% 10.75%
MSCI All Country World Ex-U.S.
Free Index(2) 14.46% 7.87% 8.64%
(1). All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%.
(2). Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country
World Ex-U.S. Free Index measures the performance of securities located in 48
countries, both developed and emerging markets, except the U.S. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice and
assistance.
MANAGEMENT TEAM The team responsible for the fund's management is:
HOWARD J. LEONARD CFA
EXECUTIVE VICE PRESIDENT, TICI
Mr. Leonard has been a manager of the fund since 1997, and has been with the
Franklin Templeton Group since 1989.
MARK R. BEVERIDGE CFA
SENIOR VICE PRESIDENT, TICI
Mr. Beveridge has been a manager of the fund since 1994, and has been with
the Franklin Templeton Group since 1994.
The fund pays the manager a fee for managing its assets, making its investment
decisions, and providing certain administrative facilities and services for the
fund. For the fiscal year ended December 31, 1998, the fund paid 0.80% of its
average daily net assets to the manager.
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TE-3 Templeton International Equity Fund - Class 2
[End callout]
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[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
- -------------------------------------------------------------------------------
o YEAR 2000 PROBLEM The funds' business operations depend on 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 similar impact on
the price of the funds' shares.
The funds' 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 replaced 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.
[Begin callout]
1 Additional Information, All Funds - Class 2
[End callout]
[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.
[Begin callout]
2 Additional Information, All Funds - Class 2
[End callout]
Fund Account Information
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
- -------------------------------------------------------------------------------
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts. The funds' Board monitors this to be sure
there are no material conflicts of interest between the two different types of
contract owners. 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 shareholder sells shares of the applicable fund to make
benefit or surrender payments or to execute exchanges (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 pointing in opposite directions] 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 fund exchanges that may be made (please see "Market Timers" below).
[Insert graphic of pen and notepad] 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' 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 shareholders 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.
STATEMENTS AND REPORTS Contract owners will receive confirmations and account
statements that show account transactions. Insurance company shareholders will
receive the fund's financial reports every six months. To reduce fund expenses,
if you need additional copies, please call 1-800/342-3863.
If there is a dealer or other investment representative of record on the
account, he or she will also receive confirmations, account statements and other
information about the contract owner's account directly from the contract's
administrator.
[Begin callout]
3 Franklin Templeton Variable Insurance Products Trust
[End callout]
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
reserves 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 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. Each
class is identical except that class 2 has a distribution plan or "rule 12b-1"
plan which is described below.
DISTRIBUTION AND SERVICES (12B-1) FEES Class 2 of each fund has a distribution
plan, sometimes known as a rule 12b-1 plan, that allows class 2 to pay
distribution and other fees to those who sell and distribute class 2 shares, or
contracts funded by class 2 shares or for services provided to contract owners.
Because these fees are paid out of class 2's assets on an on-going basis, these
fees will increase the cost of your investment and may cost you more than paying
other types of sales charges. While the maximum fee is up to 0.35% per year, the
Board of Trustees has set the current rate of 0.25% of a fund's class 2 average
daily net assets effective July 1, 1999.
[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 777 Mariners Island Blvd.,
P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at 1-800/342-3863.
For your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.
[Begin callout]
4 Franklin Templeton Variable Insurance Products Trust
[End callout]
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FOR MORE INFORMATION
The funds of the Franklin Templeton Variable Insurance Products Trust (the
Trust), formerly Franklin Valuemark Funds, are only available as investment
options in variable annuity or variable life insurance contracts. Please consult
the accompanying contract prospectus for information about the terms of an
investment in a contract.
You can learn more about the fund 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(R)Templeton(R)
1-800/342-3863
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,
D.C. 20549-0102. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5583 (Logo) Printed on recycled paper
VOTING INSTRUCTIONS CARD
FUND NAME PRINTS HERE INSURANCE COMPANY NAME PRINTS HERE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Special Meeting of Shareholders To Be Held On
February 8, 2000
THESE VOTING INSTRUCTIONS ARE REQUESTED BY THE ABOVE-NAMED INSURANCE COMPANY
IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE TRUSTEES OF TEMPLETON
VARIABLE PRODUCTS SERIES FUND.
This voting instruction card, if properly executed, will be voted by your
insurance company in the manner directed by the you. If this voting
instruction card is executed and no direction is made, this voting
instruction card will be voted FOR all proposals and, in the discretion of
the insurance company, upon such other business as may properly come before
the Special Meeting.
By signing below, I instruct the insurance company to vote the shares of the
above-named Fund of the Templeton Variable Products Series Fund related to my
contract at the Special Meeting of Shareholders to be held at 500 East Broward
Boulevard, Fort Lauderdale, Florida 33394-3091, at 3:00 pm Eastern time,
February 8, 2000 and any adjournment of the Special Meeting as indicated on the
reverse side:
PROPOSAL 1. To approve an Agreement and Plan of Reorganization between
Templeton Variable Products Series Fund (TVP Trust) and Franklin
Templeton Variable Insurance Products Trust (VIP Trust), under
which the following will occur:
o The TVP Trust will transfer all assets and liabilities of your TVP Trust
fund.
o The VIP Trust will issue shares of the corresponding VIP Trust fund in
exchange for the assets and liabilities of your fund.
o The TVP Trust will distribute shares of the corresponding VIP Trust fund
to shareholders of your fund.
o The Trustees will dissolve the TVP Trust.
all of which is described more fully in the combined proxy
statement/prospectus.
OTHER BUSINESS To vote upon any other business which may legally presented
at the meeting or any adjournment thereof.
Grant [ ] Withhold [ ]
Date: __________ Signature: _______________
If a contract is held jointly, each contract owner should sign. If only one
signs, it will be binding. If a contract owner is a business entity, please
indicate the title of the person signing.
64175v1.doc(Mia) Draft Dated September 18,
1999
Voting Instructions Card
Fund Name Prints Here Insurance Company Name Prints Here
Franklin Templeton Variable Insurance Products Trust
Special Meeting of Shareholders To Be Held On
February 8, 2000
THESE VOTING INSTRUCTIONS ARE REQUESTED BY THE ABOVE-NAMED INSURANCE COMPANY
IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE TRUSTEES OF TEMPLETON
VARIABLE PRODUCTS SERIES FUND.
This voting instruction card, if properly executed, will be voted by your
insurance company in the manner directed by the you. If this voting
instruction card is executed and no direction is made, this voting
instruction card will be voted for all proposals and, in the discretion of
the insurance company, upon such other business as may properly come before
the special meeting.
By signing below, I instruct the insurance company to vote the shares of the
above-named Fund of Franklin Templeton Variable Insurance Products Trust
related to my contract at the Special Meeting of shareholders to be held at
777 Mariners Island Boulevard, San Mateo, California 94404, at 11:00 am
Pacific time, February 8, 2000 and any adjournment of the Special Meeting as
indicated on the reverse side.
Proposal 2. To approve the adoption of new investment advisory agreement
for the Fund as described more fully in the combined proxy
statement/prospectus.
For [ ] Against[ ] Abstain [ ]
Proposal 3. To approve changes in the following fundamental investment
restrictions for the Fund as described more fully in the combined
proxy statement/prospectus. Modification of fundamental investment
restriction regarding:
For Against Abstain
(a) Diversification [ ] [ ] [ ]
(b) Borrowing [ ] [ ] [ ]
(c) Lending [ ] [ ] [ ]
(d) Underwriting [ ] [ ] [ ]
(e) Concentration [ ] [ ] [ ]
(f) Senior Securities [ ] [ ] [ ]
(g) Real Estate and Commodities,
which would combine these two separate fundamental restrictions
For [ ] Against[ ] Abstain [ ]
Proposal 4. To approve the elimination of certain fundamental investment
restrictions for the Fund as described more fully in the combined
proxy statement/prospectus.
For [ ] Against[ ] Abstain [ ]
Other Business To vote upon any other business which may legally presented
at the Special Meeting or any adjournment thereof.
Grant [ ] Withhold [ ]
Date: __________ Signature: _______________
If a contract is held jointly, each contract owner should sign. If only one
signs, it will be binding. If a contract owner is a business entity, please
indicate the title of the person signing.
STATEMENT OF ADDITIONAL INFORMATION
SPECIAL MEETING
TO BE HELD ON FEBRUARY 8, 2000
TEMPLETON VARIABLE PRODUCTS SERIES FUND
500 East Broward Boulevard
Fort Lauderdale, Florida 33394-3091
1-(800) 774-5001
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
777 Mariners Island Boulevard
San Mateo, California 94404
1-(800) 342-3863
This Statement of Additional Information is not a prospectus. A combined
proxy statement/prospectus, dated December 9, 1999, relating to the above matter
may be obtained from the office of Franklin Templeton Variable Insurance
Products Trust, 777 Mariners Island Boulevard, San Mateo, California 94404, or
by calling 1-(800) 342-3863. This Statement of Additional Information relates
to, and should be read in conjunction with the combined proxy
statement/prospectus and is incorporated by reference into that document (which
means that this statement of additional Information is legally a part of the
combined proxy statement/prospectus).
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given in the combined proxy
statement/prospectus.
The date of this statement of additional information is December 9, 1999.
1
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Information incorporated by reference
Pro forma financial statements
2
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
Each of the following documents is incorporated by reference into this Statement
of Additional Information:
1. Statement of Additional Information of the Franklin Templeton Variable
Insurance Products Series Trust ("VIP"), dated May 1, 1999, as supplemented July
1, 1999.
2. Annual Report of the VIP for the year ended December 31, 1998.
3. Semi-annual Report of the VIP for the period ended June 30, 1999.
4. Statement of Additional Information of the Templeton Variable Products Series
Fund ("TVP"), dated July 1, 1999.
5. Annual Report of the TVP for the year ended December 31, 1998.
6. Semi-annual Report of the TVP for the period ended June 30, 1999.
3
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial information gives effect to the
proposed reorganization, accounted as if the reorganization had occurred as of
June 30, 1999. In addition, each pro forma combining statement has been prepared
based upon the structure of the proposed fee and expense structure after the
combination, as discussed in the combined proxy statement/prospectus.
Pro forma financial information has not been prepared for the VIP's
Franklin S&P 500 Index Fund and the Franklin Strategic Income Securities Fund,
because such funds will be organized to facilitate the reorganization and have
not commenced operations. Moreover, the expenses of these funds are not expected
to be materially different from the expenses of the corresponding TVP funds,
each of which commenced operations after June 30, 1999.
The pro forma financial information should be read in conjunction with the
historical financial statements and notes thereto of the Franklin Templeton
Variable Insurance Products Series Trust and the Templeton Variable Products
Series Fund which are incorporated by reference in this Statement of Additional
Information. Each combination will be accounted for as a tax-free
reorganization.
4
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP CAPITAL GROWTH FUND
VIP CAPITAL GROWTH FUND TVP GROWTH INVESTMENTS FUND PRO FORMA COMBINED
-----------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 88.2%
COMMERCIAL SERVICES 3.2%
a Concord EFS Inc. ............................. 140,000 $ 5,923,750 200 $ 8,463 140,200 $ 5,932,213
Equifax Inc. ................................. 100,000 3,568,750 200 7,138 100,200 3,575,888
a Robert Half International Inc. ............... 75,000 1,950,000 200 5,200 75,200 1,955,200
----------- ----------- -----------
11,442,500 20,801 11,463,301
----------- ----------- -----------
CONSUMER DURABLES 2.0%
a Electronic Arts Inc. ......................... 50,000 2,712,500 -- -- 50,000 2,712,500
Mattel Inc. .................................. 160,000 4,230,000 200 5,288 160,200 4,235,288
----------- ----------- -----------
6,942,500 5,288 6,947,788
----------- ----------- -----------
CONSUMER NON-DURABLES 4.9%
Campbell Soup Co. ............................ 30,000 1,391,250 100 4,638 30,100 1,395,888
Coca-Cola Co. ................................ 17,000 1,062,500 -- -- 17,000 1,062,500
Hershey Foods Corp. .......................... 75,000 4,453,125 -- -- 75,000 4,453,125
Nike Inc., B ................................. 50,000 3,165,625 100 6,331 50,100 3,171,956
PepsiCo Inc. ................................. 30,000 1,160,625 -- -- 30,000 1,160,625
Philip Morris Cos. Inc. ...................... 85,000 3,415,938 200 8,038 85,200 3,423,976
Procter & Gamble Co. ......................... 30,000 2,677,500 -- -- 30,000 2,677,500
----------- ----------- -----------
17,326,563 19,007 17,345,570
----------- ----------- -----------
CONSUMER SERVICES 3.0%
McDonald's Corp. ............................. 100,000 4,131,250 -- -- 100,000 4,131,250
a Mirage Resorts Inc. .......................... 110,000 1,842,500 300 5,025 110,300 1,847,525
Time Warner Inc. ............................. 64,000 4,704,000 -- -- 64,000 4,704,000
----------- ----------- -----------
10,677,750 5,025 10,682,775
----------- ----------- -----------
ELECTRONIC TECHNOLOGY 18.5%
a 3Com Corp. ................................... 85,000 2,268,438 100 2,669 85,100 2,271,107
a Applied Materials Inc. ....................... 55,000 4,063,125 100 7,388 55,100 4,070,513
a Cisco Systems Inc. ........................... 110,000 7,095,000 200 12,900 110,200 7,107,900
Compaq Computer Corp. ........................ 100,000 2,368,750 200 4,738 100,200 2,373,488
Hewlett-Packard Co. .......................... 65,000 6,532,500 100 10,050 65,100 6,542,550
Intel Corp. .................................. 50,000 2,975,000 200 11,900 50,200 2,986,900
International Business Machines Corp. ........ 50,000 6,462,500 -- -- 50,000 6,462,500
a KLA-Tencor Corp. ............................. 50,000 3,243,750 -- -- 50,000 3,243,750
Linear Technology Corp. ...................... 65,000 4,371,250 -- -- 65,000 4,371,250
Lucent Technologies Inc. ..................... 30,000 2,023,125 50 3,372 30,050 2,026,497
Molex Inc. ................................... 63,437 2,347,169 200 7,400 63,637 2,354,569
Nortel Networks Corp. (Canada) ............... -- -- 50 4,341 50 4,341
a Synopsys Inc. ................................ 70,000 3,863,125 -- -- 70,000 3,863,125
a Tellabs Inc. ................................. 24,000 1,621,500 50 3,378 24,050 1,624,878
a Uniphase Corp. ............................... 40,000 6,640,000 100 16,600 40,100 6,656,600
United Technologies Corp. .................... 60,000 4,301,250 -- -- 60,000 4,301,250
a Xilinx Inc. .................................. 100,000 5,725,000 -- -- 100,000 5,725,000
----------- ----------- -----------
65,901,482 84,736 65,986,218
----------- ----------- -----------
ENERGY MINERALS 1.9%
a Barrett Resources Corp. ...................... 58,200 2,233,425 -- -- 58,200 2,233,425
Royal Dutch Petroleum Co., N.Y. shs.,
ADR (Netherlands) ........................... 75,000 4,518,750 100 6,025 75,100 4,524,775
----------- ----------- -----------
6,752,175 6,025 6,758,200
----------- ----------- -----------
FINANCE 9.6%
American International Group Inc. ............ 33,550 3,927,447 -- -- 33,550 3,927,447
Associates First Capital Corp., A ............ 70,000 3,101,875 200 8,863 70,200 3,110,738
Bank One Corp. ............................... 85,000 5,062,813 -- -- 85,000 5,062,813
Charles Schwab Corp. ......................... 32,500 3,570,938 50 5,494 32,550 3,576,432
Citigroup Inc. ............................... 127,500 6,056,250 150 7,125 127,650 6,063,375
Fannie Mae ................................... 75,000 5,128,125 100 6,838 75,100 5,134,963
a Goldman Sachs Group Inc. ..................... 22,600 1,632,850 100 7,225 22,700 1,640,075
Providian Financial Corp. .................... 38,000 3,553,000 -- -- 38,000 3,553,000
a TD Waterhouse Group Inc. ..................... 89,900 2,253,119 200 5,013 90,100 2,258,132
----------- ----------- -----------
34,286,417 40,558 34,326,975
----------- ----------- -----------
See accompanying notes to pro forma combining financial statements.
5
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP CAPITAL GROWTH FUND
VIP CAPITAL GROWTH FUND TVP GROWTH INVESTMENTS FUND PRO FORMA COMBINED
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH SERVICES 1.0%
McKesson HBOC Inc. ........................... 59,000 $ 1,895,375 50 $ 1,606 59,050 $ 1,896,981
Omnicare Inc. ................................ 120,000 1,767,500 -- -- 120,000 1,767,500
----------- ----------- -----------
3,662,875 1,606 3,664,481
----------- ----------- -----------
HEALTH TECHNOLOGY 13.8%
Abbott Laboratories .......................... 110,000 5,005,000 200 9,100 110,200 5,014,100
American Home Products Corp. ................. 60,000 3,450,000 100 5,750 60,100 3,455,750
a Amgen Inc. ................................... 90,000 5,478,750 -- -- 90,000 5,478,750
Baxter International Inc. .................... 70,000 4,243,750 100 6,063 70,100 4,249,813
a Boston Scientific Corp. ...................... 85,000 3,734,688 100 4,394 85,100 3,739,082
Bristol-Myers Squibb Co. ..................... 80,000 5,635,000 -- -- 80,000 5,635,000
a Centocor Inc. ................................ 21,000 979,125 -- -- 21,000 979,125
Eli Lilly & Co. .............................. 40,000 2,865,000 -- -- 40,000 2,865,000
a Guidant Corp. ................................ 5,000 257,188 100 5,144 5,100 262,332
Johnson & Johnson ............................ 55,000 5,390,000 100 9,800 55,100 5,399,800
Medtronic Inc. ............................... 50,000 3,893,750 -- -- 50,000 3,893,750
Merck & Co. Inc. ............................. 15,000 1,110,000 -- -- 15,000 1,110,000
Pfizer Inc. .................................. 22,000 2,414,500 -- -- 22,000 2,414,500
Schering-Plough Corp. ........................ 90,000 4,770,000 200 10,600 90,200 4,780,600
----------- ----------- -----------
49,226,751 50,851 49,277,602
----------- ----------- -----------
INDUSTRIAL SERVICES 3.6%
a AES Corp. .................................... 65,000 3,778,125 100 5,813 65,100 3,783,938
a Republic Services Inc., A .................... 164,500 4,071,375 200 4,950 164,700 4,076,325
Schlumberger Ltd. ............................ 75,000 4,776,563 -- -- 75,000 4,776,563
----------- ----------- -----------
12,626,063 10,763 12,636,826
----------- ----------- -----------
NON-ENERGY MINERALS 1.0%
De Beers Consolidated Mines AG, ADR
(South Africa) .............................. 150,000 3,581,250 200 4,775 150,200 3,586,025
----------- ----------- -----------
PROCESS INDUSTRIES 3.4%
Air Products & Chemicals Inc. ................ 70,000 2,817,500 200 8,050 70,200 2,825,550
Millipore Corp. .............................. 60,000 2,433,750 -- -- 60,000 2,433,750
a Owens-Illinois Inc. .......................... 60,000 1,961,250 -- -- 60,000 1,961,250
Pall Corp. ................................... 110,000 2,440,625 200 4,438 110,200 2,445,063
Sigma-Aldrich Corp. .......................... 70,000 2,410,625 -- -- 70,000 2,410,625
----------- ----------- -----------
12,063,750 12,488 12,076,238
----------- ----------- -----------
PRODUCER MANUFACTURING 1.8%
Avery Dennison Corp. ......................... 30,000 1,811,250 -- -- 30,000 1,811,250
Emerson Electric Co. ......................... 40,000 2,515,000 100 6,288 40,100 2,521,288
Minnesota Mining & Manufacturing Co. ......... 25,000 2,173,438 -- -- 25,000 2,173,438
----------- ----------- -----------
6,499,688 6,288 6,505,976
----------- ----------- -----------
RETAIL TRADE 4.5%
Albertson's Inc. ............................. 85,000 4,382,813 100 5,156 85,100 4,387,969
Tiffany & Co. ................................ 60,000 5,790,000 100 9,650 60,100 5,799,650
Wal-Mart Stores Inc. ......................... 120,000 5,790,000 -- -- 120,000 5,790,000
----------- ----------- -----------
15,962,813 14,806 15,977,619
----------- ----------- -----------
TECHNOLOGY SERVICES 6.6%
Automatic Data Processing Inc. ............... 150,000 6,600,000 200 8,800 150,200 6,608,800
a Computer Sciences Corp. ...................... 50,000 3,459,375 -- -- 50,000 3,459,375
a EMC Corp. .................................... 50,000 2,750,000 -- -- 50,000 2,750,000
a Microsoft Corp. .............................. 80,000 7,215,000 200 18,038 80,200 7,233,038
a Oracle Corp. ................................. 90,000 3,341,250 -- -- 90,000 3,341,250
----------- ----------- -----------
23,365,625 26,838 23,392,463
----------- ----------- -----------
TELECOMMUNICATIONS 2.4%
GTE Corp. .................................... 50,000 3,787,500 -- -- 50,000 3,787,500
Vodafone AirTouch PLC, ADR
(United Kingdom) ............................ 25,000 4,925,000 50 9,850 25,050 4,934,850
----------- ----------- -----------
8,712,500 9,850 8,722,350
----------- ----------- -----------
See accompanying notes to pro forma combining financial statements.
6
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP CAPITAL GROWTH FUND
VIP CAPITAL GROWTH FUND TVP GROWTH INVESTMENTS FUND PRO FORMA COMBINED
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
TRANSPORTATION 2.6%
Air Express International Corp. .............. 150,000 $ 3,806,250 300 $ 7,613 150,300 $ 3,813,863
Expeditors International of
Washington Inc. ............................. 120,000 3,270,000 200 5,450 120,200 3,275,450
Southwest Airlines Co. ....................... 70,000 2,178,750 -- -- 70,000 2,178,750
----------- ----------- -----------
9,255,000 13,063 9,268,063
----------- ----------- -----------
UTILITIES 4.4%
CMS Energy Corp. ............................. 117,000 4,899,375 150 6,281 117,150 4,905,656
Dominion Resources Inc. ...................... 42,000 1,819,125 100 4,331 42,100 1,823,456
Enron Corp. .................................. 60,000 4,905,000 100 8,175 60,100 4,913,175
MCN Energy Group Inc. ........................ 90,100 1,869,570 150 3,113 90,250 1,872,683
PECO Energy Co. .............................. 50,000 2,093,750 100 4,189 50,100 2,097,939
----------- ----------- -----------
15,586,820 26,089 15,612,909
----------- ----------- -----------
TOTAL LONG TERM INVESTMENTS
(COST $238,590,005) 313,872,522 358,857 314,231,379
----------- ----------- -----------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
----------- ----------- -----------
b REPURCHASE AGREEMENT 11.8%
Joint Repurchase Agreement,
4.767%, 7/01/99,
(Maturity Value $42,202,325)
(COST $42,196,737) ......................... $42,076,712 42,076,712 $120,025 120,025 $42,196,737 42,196,737
Barclays Capital Inc.
(Maturity Value $5,323,400)
Bear, Stearns & Co. Inc.
(Maturity Value $4,697,118)
Chase Securities Inc.
(Maturity Value $869,368)
CIBC Oppenheimer Corp.
(Maturity Value $5,323,400)
Donaldson, Lufkin & Jenrette
Securities Corp.
(Maturity Value $3,757,695)
Dresdner Kleinwort Benson,
North America LLC
(Maturity Value $3,757,695)
Goldman, Sachs & Co.
(Maturity Value $1,878,847)
NationsBanc Montgomery
Securities LLC
(Maturity Value $3,757,695)
Paine Webber Inc.
(Maturity Value $3,757,695)
Paribas Corp.
(Maturity Value $3,756,011)
Warburg Dillon Read LLC
(Maturity Value $5,323,401)
Collateralized by U.S. Treasury Bills & Notes
----------- ----------- -----------
TOTAL INVESTMENTS
(COST $280,786,742) 100.0% 355,949,234 478,882 356,428,116
OTHER ASSETS, LESS LIABILITIES (105,172) 9,707 (95,465)
----------- ----------- -----------
NET ASSETS 100.0% $355,844,062 $488,589 $356,332,651
=========== =========== ===========
</TABLE>
a Non-income producing.
b Investment is through participation in a joint account with other funds
managed by the investment advisor. At 6/30/99, all repurchase agreements
had been entered into on that date.
See accompanying notes to pro forma combining financial statements.
7
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
CAPITAL
VIP TVP GROWTH FUND
CAPITAL GROWTH PRO FORMA
GROWTH FUND INVESTMENTS FUND COMBINED
--------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ........................................................... $238,302,547 $ 287,458 $238,590,005
--------------------------------------------------------
Value .......................................................... 313,872,522 358,857 314,231,379
Repurchase agreements, at value and cost ........................ 42,076,712 120,025 42,196,737
Receivables:
Investment securities sold .................................... 1,657,275 16,784 1,674,059
Capital shares sold ........................................... 967,061 1,505 968,566
Dividends and interest ........................................ 688,532 236 688,768
--------------------------------------------------------
Total assets ............................................... 359,262,102 497,407 359,759,509
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................ 2,374,950 5,644 2,380,594
Capital shares redeemed ........................................ 811,754 -- 811,754
Affiliates ..................................................... 210,988 -- 210,988
Custodian fees ................................................. 881 -- 881
Postage and mailing fees ....................................... 10,911 -- 10,911
Other liabilities ............................................... 8,556 3,174 11,730
--------------------------------------------------------
Total liabilities .......................................... 3,418,040 8,818 3,426,858
--------------------------------------------------------
Net assets, at value ...................................... $355,844,062 $ 488,589 $356,332,651
========================================================
CLASS 1 :
Net assets, at value ............................................ $355,536,656 $ 488,589 $356,025,245
========================================================
Shares outstanding** ............................................ 19,689,451 37,220 19,716,505
========================================================
Net asset value and offering price per share .................... $ 18.06 $ 13.13 $ 18.06
========================================================
CLASS 2 :
Net assets, at value ............................................ $ 307,406 N/A $ 307,406
========================================================
Shares outstanding .............................................. 17,055 N/A 17,055
========================================================
Net asset value and offering price per share .................... $ 18.02 N/A $ 18.02
========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
8
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
CAPITAL
VIP TVP GROWTH FUND
CAPITAL GROWTH PRO FORMA PRO FORMA
GROWTH FUND INVESTMENTS FUND ADJUSTMENTS COMBINED
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:1
Dividends ................................................... $ 1,166,373 $ 1,495 -- $ 1,167,868
Interest .................................................... 1,245,140 1,997 -- 1,247,137
----------------------------------------------------------------
Total investment income ................................ 2,411,513 3,492 -- 2,415,005
----------------------------------------------------------------
Expenses:
Management fees ............................................. 1,141,192 1,133 472 2 1,142,797
Administrative fees ......................................... -- 221 (221) 3 --
Distribution fees - Class 2 ................................. 198 -- (33) 165
Custodian fees .............................................. 1,351 20 -- 1,371
Reports to shareholders ..................................... 18,685 3,682 -- 22,367
Registration and filing fees ................................ -- 37 -- 37
Professional fees ........................................... 4,961 261 -- 5,222
Trustees' fees and expenses ................................. 785 254 -- 1,039
Other ....................................................... 784 93 -- 877
----------------------------------------------------------------
Total expenses ......................................... 1,167,956 5,701 218 1,173,875
Expenses waived/paid by affiliate ...................... -- (3,849) 3,849 4 --
----------------------------------------------------------------
Net expenses .......................................... 1,167,956 1,852 4,067 1,173,875
----------------------------------------------------------------
Net investment income ................................ 1,243,557 1,640 (4,067) 1,241,130
----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments .......................... 4,715,973 21,796 -- 4,737,769
Net unrealized appreciation on investments .................. 30,659,765 38,157 -- 30,697,922
----------------------------------------------------------------
Net realized and unrealized gain ............................. 35,375,738 59,953 -- 35,435,691
----------------------------------------------------------------
Net increase in net assets resulting from operations ......... $36,619,295 $ 61,593 $ (4,067) $36,676,821
================================================================
</TABLE>
1 Net of foreign taxes and fees of $13,674 for the VIP Capital Growth Fund.
2 Pro Forma adjustment for difference in Management fee schedule. The Pro
Forma Combined VIP Fund's Management fee will be .75% of the first $500
million. Fees are reduced on net assets over $500 million.
3 Under an agreement with Advisers, FT Services will provide administrative
services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers
based on average daily net assets, and is not an additional expense of the
Pro Forma Combined VIP Fund.
4 The Pro Forma adjustment to remove TVP Growth Investments expense
limitation.
See accompanying notes to pro forma combining financial statements.
9
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
CAPITAL
VIP TVP GROWTH FUND
CAPITAL GROWTH PRO FORMA PRO FORMA
GROWTH FUND INVESTMENTS FUND2 ADJUSTMENTS COMBINED
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:1
Dividends ................................................. $ 1,068,089 $ 1,610 $ -- $ 1,069,699
Interest .................................................. 1,612,127 2,072 -- 1,614,199
------------------------------------------------------------------
Total Investment Income .............................. 2,680,216 3,682 -- 2,683,898
------------------------------------------------------------------
Expenses:
Management fees ........................................... 1,140,016 1,009 252 3 1,141,277
Administrative Fees ....................................... -- 250 (250)4 --
Custodian fees ............................................ 1,615 20 -- 1,635
Reports to shareholders ................................... 15,378 5,921 -- 21,299
Registration and filing fees .............................. -- 45 -- 45
Professional fees ......................................... 6,705 275 -- 6,980
Trustees' fees and expenses ............................... 1,008 325 -- 1,333
Other ..................................................... 961 25 -- 986
------------------------------------------------------------------
Total expenses ....................................... 1,165,683 7,870 2 1,173,555
Expenses waived/paid by affiliate .................... -- (6,176) 6,176 5 --
------------------------------------------------------------------
Net expenses ....................................... 1,165,683 1,694 6,178 1,173,555
------------------------------------------------------------------
Net Investment Income ............................. 1,514,533 1,988 (6,178) 1,510,343
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ................. (3,325,719) (1,610) -- (3,327,329)
Net unrealized appreciation on investments ................ 31,691,954 33,242 -- 31,725,196
------------------------------------------------------------------
Net realized and unrealized gain ........................... 28,366,235 31,632 -- 28,397,867
------------------------------------------------------------------
Net increase in net assets resulting from operations ....... $ 29,880,768 $ 33,620 $ (6,178) $ 29,908,210
==================================================================
</TABLE>
1 Net of foreign taxes of $13,205 and $24 for the VIP Capital Growth Fund
and the TVP Growth Investments Fund, respectively.
2 For the period from May 1, 1998 to December 31, 1998
3 Pro Forma adjustment for the difference in Management fee schedule. The
Pro Forma Combined VIP's Management fee will be .75% of the first $500
million.
4 Under an agreement with Advisers, FT Services will provide administrative
services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers
based on average daily net assets, and is not an additional expense of the
Pro Forma Combined VIP Fund.
5 The Pro Forma adjustment to remove the TVP Growth Investments expense
limitation.
See accompanying notes to pro forma combining financial statements.
10
<PAGE>
VIP CAPITAL GROWTH FUND
TVP GROWTH INVESTMENTS FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION:
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the TVP Growth Investments Fund
("Growth Investments Fund"), the VIP Capital Growth Fund ("Capital Growth Fund")
will acquire all the net assets of the Growth Investments Fund in exchange for
the Class 1 shares of Capital Growth Fund. The merger will be accounted for by
the method of accounting for tax free business combinations of investment
companies. The pro forma combining Statement of Assets and Liabilities reflects
the financial position of Capital Growth Fund and Growth Investments Fund at
June 30, 1999 as though the merger occurred as of that date. The pro forma
combining Statement of Operations reflects the results of operations of the
Capital Growth Fund and the Growth Investments Fund for the period January 1,
1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro
forma financial statements do not reflect the expenses of either fund in
carrying out its obligations under the Agreement and Plan of Reorganization or
any adjustment with respect to additional distributions that may be made prior
to reorganization. The pro forma financial statements are presented for the
information of the reader, and should be read in conjunction with the historical
financial statements of the funds.
2. SHARES OF BENEFICIAL INTEREST:
The number of Class 1 shares issued was calculated by dividing the Class 1 net
assets of the TVP Growth Investments Fund at June 30, 1999 by the Class 1 net
asset value per share of the VIP Capital Growth Fund at June 30, 1999.
11
<PAGE>
VIP SMALL CAP FUND
TVP SMALL CAP INVESTMENTS FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TVP VIP SMALL CAP FUND
VIP SMALL CAP FUND SMALL CAP INVESTMENTS FUND PRO FORMA COMBINED
----------------------------------------------------------------------------
SHARES/ SHARES/ SHARES/
RIGHTS VALUE RIGHTS VALUE RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS AND RIGHTS 96.1%
COMMERCIAL SERVICES 3.2%
a 24/7 Media Inc. .............................. 28,800 $ 1,108,800 500 $ 19,250 29,300 $ 1,128,050
a Applied Graphics Technologies Inc. ........... 88,700 1,119,838 -- -- 88,700 1,119,838
a Corporate Executive Board Co. ................ 5,700 202,706 2,200 78,238 7,900 280,944
a Exchange Applications Inc. ................... 13,500 550,125 700 28,525 14,200 578,650
a Inet Technologies Inc. ....................... 24,300 583,200 1,400 33,600 25,700 616,800
a Lamar Advertising Co., A ..................... -- -- 800 32,750 800 32,750
Norrell Corp. ................................ 82,100 1,544,506 -- -- 82,100 1,544,506
a NOVA Corp. ................................... 55,900 1,397,500 5,000 125,000 60,900 1,522,500
a Probusiness Services Inc. .................... -- -- 700 25,113 700 25,113
a RemedyTemp Inc., A ........................... 29,500 398,250 -- -- 29,500 398,250
a Smith-Gardner & Associates Inc. .............. 4,100 33,056 3,300 26,606 7,400 59,662
a SOS Staffing Services Inc. ................... 75,500 396,375 -- -- 75,500 396,375
a Stamps.com Inc. .............................. -- -- 900 15,750 900 15,750
a Sylvan Learning Systems Inc. ................. 64,100 1,742,719 2,000 54,375 66,100 1,797,094
a Viant Corp. .................................. -- -- 200 7,000 200 7,000
a WESCO International Inc. ..................... 29,100 596,550 1,500 30,750 30,600 627,300
----------- ----------- -----------
9,673,625 476,957 10,150,582
----------- ----------- -----------
CONSUMER DURABLES .4%
a Activision Inc. .............................. 75,700 1,102,381 -- -- 75,700 1,102,381
Ethan Allen Interiors Inc. ................... -- -- 3,000 113,250 3,000 113,250
----------- ----------- -----------
1,102,381 113,250 1,215,631
----------- ----------- -----------
CONSUMER NON-DURABLES 2.5%
Alberto-Culver Co., A ........................ 7,100 157,407 -- -- 7,100 157,407
a Sola International Inc. ...................... 24,400 474,275 -- -- 24,400 474,275
a Tommy Hilfiger Corp. ......................... 66,800 4,909,800 5,000 367,500 71,800 5,277,300
a Tropical Sportswear International Corp. ...... 33,700 1,074,188 6,000 191,250 39,700 1,265,438
Wolverine World Wide Inc. .................... 55,000 770,000 4,300 60,200 59,300 830,200
----------- ----------- -----------
7,385,670 618,950 8,004,620
----------- ----------- -----------
a CONSUMER SERVICES 4.4%
BEA Systems Inc. ............................. -- -- 2,900 82,831 2,900 82,831
DeVry Inc. ................................... 77,800 1,740,775 -- -- 77,800 1,740,775
Entercom Communications Corp. ................ 1,300 55,575 1,000 42,750 2,300 98,325
Foodmaker Inc. ............................... 37,400 1,061,225 7,000 198,625 44,400 1,259,850
Harrah's Entertainment Inc. .................. 59,900 1,317,800 6,900 151,800 66,800 1,469,600
Intelligent Life Corp. ....................... 61,600 404,250 4,400 28,875 66,000 433,125
Jones Intercable Inc. ........................ 2,100 100,800 -- -- 2,100 100,800
Jones Intercable Inc., A ..................... 29,100 1,425,900 2,000 98,000 31,100 1,523,900
MeriStar Hotels & Resorts Inc. ............... 120,000 412,500 -- -- 120,000 412,500
Prime Hospitality Corp. ...................... 238,000 2,856,000 4,600 55,200 242,600 2,911,200
Radio One Inc. ............................... 5,700 265,050 300 13,950 6,000 279,000
SFX Entertainment Inc. ....................... 39,300 2,515,200 2,550 163,200 41,850 2,678,400
Vail Resorts Inc. ............................ 51,700 904,750 3,500 61,250 55,200 966,000
----------- ----------- -----------
13,059,825 896,481 13,956,306
----------- ----------- -----------
a ELECTRONIC TECHNOLOGY 22.8%
Advanced Energy Industries Inc. .............. 48,800 1,979,450 1,100 44,619 49,900 2,024,069
Alpha Industries Inc. ........................ 17,000 809,625 3,000 142,875 20,000 952,500
American Xtal Technology Inc. ................ -- -- 4,500 107,156 4,500 107,156
ANTEC Corp. .................................. 5,000 160,313 200 6,413 5,200 166,726
Aspect Telecommunications Corp. .............. 61,200 596,700 1,400 13,650 62,600 610,350
AVT Corp. .................................... 51,200 1,939,200 1,400 53,025 52,600 1,992,225
Brocade Communications Systems Inc. .......... 1,400 135,013 200 19,288 1,600 154,301
Carrier Access Corp. ......................... 23,300 1,020,831 2,700 118,294 26,000 1,139,125
Catapult Communications Corp. ................ 37,000 698,375 1,100 20,763 38,100 719,138
Coherent Inc. ................................ 178,400 3,322,700 6,000 111,750 184,400 3,434,450
Com21 Inc. ................................... 75,000 1,279,688 3,400 58,013 78,400 1,337,701
Copper Mountain Networks Inc. ................ 1,100 84,975 100 7,725 1,200 92,700
Cymer Inc. ................................... 6,500 162,500 300 7,500 6,800 170,000
Digital Microwave Corp. ...................... -- -- 600 7,650 600 7,650
EG&G Inc. .................................... -- -- 1,000 35,625 1,000 35,625
Electro Scientific Industries Inc. ........... -- -- 2,500 104,453 2,500 104,453
See accompanying notes to pro forma combining financial statements.
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COMMON STOCKS AND RIGHTS (CONT.)
a ELECTRONIC TECHNOLOGY (CONT.)
EMCORE Corp. ................................. 28,400 $ 571,550 1,800 $ 36,225 30,200 $ 607,775
Etec Systems Inc. ............................ 38,100 1,266,825 1,700 56,525 39,800 1,323,350
E-Tek Dynamics Inc. .......................... 6,500 309,156 500 23,781 7,000 332,937
Excel Switching Corp. ........................ 23,800 712,513 600 17,963 24,400 730,476
Flextronics International Ltd. ............... 52,000 2,886,000 1,500 83,250 53,500 2,969,250
FLIR Systems Inc. ............................ 90,000 1,361,250 1,500 22,688 91,500 1,383,938
FVC.COM Inc. ................................. 24,000 156,000 400 2,600 24,400 158,600
Gemstar International Group Ltd. ............. 70,400 4,593,600 2,300 150,075 72,700 4,743,675
Harmonic Inc. ................................ 30,500 1,751,844 -- -- 30,500 1,751,844
hi/fn Inc. ................................... 3,000 228,375 100 7,613 3,100 235,988
H.T.E. Inc. .................................. 47,500 160,313 -- -- 47,500 160,313
Itron Inc. ................................... 62,800 537,725 -- -- 62,800 537,725
Jabil Circuit Inc. ........................... 55,000 2,481,875 1,000 45,125 56,000 2,527,000
Javelin Systems Inc. ......................... 29,200 357,700 1,200 14,700 30,400 372,400
Juniper Networks Inc. ........................ -- -- 400 59,600 400 59,600
Komag Inc. ................................... 317,800 1,052,713 15,000 49,688 332,800 1,102,401
Ladish Co. Inc. .............................. 58,800 455,700 -- -- 58,800 455,700
Latitude Communications Inc. ................. 5,800 75,400 300 3,900 6,100 79,300
Lattice Semiconductor Corp. .................. 10,300 641,175 3,200 199,200 13,500 840,375
Level One Communications Inc. ................ -- -- 900 44,044 900 44,044
Maker Communications Inc. .................... 1,000 31,000 11,000 341,000 12,000 372,000
Mettler-Toledo International Inc. ............ 122,000 3,027,125 6,000 148,875 128,000 3,176,000
Micrel Inc. .................................. 7,500 555,000 600 44,400 8,100 599,400
Natural MicroSystems Corp. ................... 80,900 773,606 900 8,606 81,800 782,212
Netopia Inc. ................................. -- -- 700 15,925 700 15,925
Novellus Systems Inc. ........................ 18,400 1,255,800 600 40,950 19,000 1,296,750
Perceptron Inc. .............................. 85,000 387,813 -- -- 85,000 387,813
Photronics Inc. .............................. 8,400 205,800 -- -- 8,400 205,800
PLX Technology Inc. .......................... 5,200 246,350 200 9,475 5,400 255,825
PMC-Sierra Inc. .............................. 106,000 6,247,375 5,000 294,688 111,000 6,542,063
Sanmina Corp. ................................ 26,800 2,033,450 2,500 189,688 29,300 2,223,138
Security Dynamics Technologies Inc. .......... 155,700 3,308,625 8,000 170,000 163,700 3,478,625
SIPEX Corp. .................................. 27,000 553,500 2,500 51,250 29,500 604,750
Synopsys Inc. ................................ 100,000 5,518,750 5,000 275,938 105,000 5,794,688
Tekelec ...................................... 115,900 1,412,532 5,900 71,906 121,800 1,484,438
TriStar Aerospace Co. ........................ 31,400 259,050 -- -- 31,400 259,050
Uniphase Corp. ............................... 40,900 6,789,400 2,100 348,600 43,000 7,138,000
Veeco Instruments Inc. ....................... 6,800 231,200 300 10,200 7,100 241,400
Waters Corp. ................................. 70,000 3,718,750 4,000 212,500 74,000 3,931,250
Wavecom SA, ADR (France) ..................... 8,200 107,625 500 6,563 8,700 114,188
Western Digital Corp. ........................ 60,000 390,000 6,500 42,250 66,500 432,250
----------- ----------- -----------
68,841,835 3,958,590 72,800,425
----------- ----------- -----------
ENERGY MINERALS 4.6%
a Barrett Resources Corp. ...................... 113,900 4,370,913 5,200 199,550 119,100 4,570,463
a Basin Exploration Inc. ....................... -- -- 2,200 44,138 2,200 44,138
a Denbury Resources Inc. ....................... 85,800 375,375 -- -- 85,800 375,375
a Forest Oil Corp. ............................. 56,700 712,294 3,300 41,456 60,000 753,750
a Newfield Exploration Co. ..................... 125,800 3,577,438 7,200 204,750 133,000 3,782,188
Range Resources Corp. ........................ 125,000 765,625 100 613 125,100 766,238
a Santa Fe Snyder Corp. ........................ 262,810 2,003,926 16,400 125,050 279,210 2,128,976
a Titan Exploration Inc. ....................... 128,300 641,500 -- -- 128,300 641,500
a Tom Brown Inc. ............................... 95,000 1,478,438 6,600 102,713 101,600 1,581,151
----------- ----------- -----------
13,925,509 718,270 14,643,779
----------- ----------- -----------
FINANCE 7.7%
a Affiliated Managers Group Inc. ............... 44,700 1,349,381 2,100 63,394 46,800 1,412,775
Allied Capital Corp. ......................... 40,000 960,000 -- -- 40,000 960,000
Bank United Corp., A ......................... 50,000 2,009,375 1,600 64,300 51,600 2,073,675
a DLJdirect .................................... 32,300 952,850 1,800 53,100 34,100 1,005,950
Espirito Santo Financial Group SA, ADR
(Luxembourg) ................................ 25,900 424,113 200 3,275 26,100 427,388
See accompanying notes to pro forma combining financial statements.
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FINANCE (CONT.)
EVEREN Capital Corp. ......................... 42,000 $ 1,252,125 -- $ -- 42,000 $ 1,252,125
E.W. Blanch Holdings Inc. .................... 5,000 340,938 200 13,638 5,200 354,576
Federated Investors Inc., B .................. 122,900 2,204,519 5,700 102,244 128,600 2,306,763
a First Sierra Financial Inc. .................. 25,800 645,000 1,500 37,500 27,300 682,500
Freedom Securities Corp. ..................... 26,300 450,388 -- -- 26,300 450,388
a Golden State Bancorp Inc. .................... 118,000 2,596,000 6,000 132,000 124,000 2,728,000
a Hambrecht & Quist Group ...................... 20,000 742,500 800 29,700 20,800 772,200
a HealthCare Financial Partners Inc. ........... 39,100 1,339,175 1,200 41,100 40,300 1,380,275
Heller Financial Inc. ........................ 18,800 522,875 700 19,469 19,500 542,344
a Knight/Trimark Group Inc., A ................. 25,100 1,513,844 1,100 66,344 26,200 1,580,188
Metris Cos. Inc. ............................. -- -- 300 12,225 300 12,225
Mutual Risk Management Ltd. .................. 42,600 1,421,775 4,400 146,850 47,000 1,568,625
a National Discount Brokers Group Inc. ......... -- -- 1,000 58,000 1,000 58,000
a Radian Group Inc ............................. 31,038 1,515,045 -- -- 31,038 1,515,045
a Silicon Valley Bancshares .................... 97,400 2,410,650 4,000 99,000 101,400 2,509,650
Westamerica BanCorp .......................... 27,900 1,018,350 600 21,900 28,500 1,040,250
a WIT Capital Group Inc. ....................... 3,800 129,200 300 10,200 4,100 139,400
----------- ----------- -----------
23,798,103 974,239 24,772,342
----------- ----------- -----------
a HEALTH SERVICES 2.8%
American Dental Partners Inc. ................ 20,300 225,838 -- -- 20,300 225,838
Beverly Enterprises Inc. ..................... 136,900 1,103,756 10,000 80,625 146,900 1,184,381
Careinsite Inc. .............................. -- -- 14,700 694,575 14,700 694,575
Eclipsys Corp. ............................... 1,422 34,039 -- -- 1,422 34,039
Integrated Health Services Inc. .............. 54,000 432,000 5,000 40,000 59,000 472,000
New American Healthcare Corp. ................ 8,100 18,731 8,100 18,731
PAREXEL International Corp. .................. 65,000 865,313 3,000 39,938 68,000 905,251
Pediatrix Medical Group Inc. ................. -- -- 1,300 27,625 1,300 27,625
Pharmaceutical Product
Development Inc. ............................ 85,000 2,326,875 6,700 183,413 91,700 2,510,288
Renal Care Group Inc. ........................ 94,650 2,449,069 2,700 69,863 97,350 2,518,932
Total Renal Care Holdings Inc. ............... 15,933 247,957 -- -- 15,933 247,957
----------- ----------- -----------
7,703,578 1,136,039 8,839,617
----------- ----------- -----------
a HEALTH TECHNOLOGY 1.1%
Heska Corp. .................................. 39,300 90,881 -- -- 39,300 90,881
Inhale Therapeutic Systems Inc. .............. 59,300 1,412,081 3,000 71,438 62,300 1,483,519
OrthoLogic Corp. ............................. 226,700 559,677 -- -- 226,700 559,677
Serologicals Corp. ........................... 138,750 1,127,344 17,000 138,125 155,750 1,265,469
SkyePharma PLC, ADR
(United Kingdom) ............................ 24,391 187,506 -- -- 24,391 187,506
SkyePharma PLC, rts., 3/31/00
(United Kingdom) ............................ 83,600 -- -- -- 83,600 --
Wesley Jessen VisionCare Inc. ................ -- 1,300 42,088 1,300 42,088
----------- ----------- -----------
3,377,489 251,651 3,629,140
----------- ----------- -----------
a INDUSTRIAL SERVICES 4.5%
Atwood Oceanics Inc. ......................... 3,400 106,250 6,000 187,500 9,400 293,750
Casella Waste Systems Inc., A ................ 12,700 330,200 3,500 91,000 16,200 421,200
Catalytica Inc. .............................. 193,733 2,712,262 5,000 70,000 198,733 2,782,262
Core Laboratories NV (Netherlands) ........... 110,400 1,538,700 3,000 41,813 113,400 1,580,513
Dycom Industries Inc. ........................ 15,700 879,200 5,200 291,200 20,900 1,170,400
KTI Inc. ..................................... 3,000 42,750 200 2,850 3,200 45,600
Marine Drilling Cos. Inc. .................... 71,100 973,181 3,000 41,063 74,100 1,014,244
Safety-Kleen Corp. ........................... 25,000 453,125 3,575 64,797 28,575 517,922
Tuboscope Inc. ............................... 121,300 1,660,294 -- -- 121,300 1,660,294
US Liquids Inc. .............................. 74,800 1,561,450 1,800 37,575 76,600 1,599,025
Varco International Inc. ..................... 300,800 3,290,000 16,000 175,000 316,800 3,465,000
----------- ----------- -----------
13,547,412 1,002,798 14,550,210
----------- ----------- -----------
INSURANCE 2.5%
Financial Security Assurance
Holdings Ltd. ............................... 63,000 3,276,000 4,000 208,000 67,000 3,484,000
HCC Insurance Holdings Inc. .................. 32,300 732,806 4,200 95,288 36,500 828,094
See accompanying notes to pro forma combining financial statements.
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INSURANCE (CONT.)
Life USA Holding Inc. ........................ 21,200 $ 429,300 -- $ -- 21,200 $ 429,300
Reinsurance Group of America Inc. ............ 37,300 1,314,825 4,300 151,575 41,600 1,466,400
a Risk Capital Holdings Inc. ................... 125,000 1,687,500 -- -- 125,000 1,687,500
----------- ----------- -----------
7,440,431 454,863 7,895,294
----------- ----------- -----------
NON-ENERGY MINERALS .5%
Carpenter Technology Corp. ................... 50,000 1,428,125 1,200 34,275 51,200 1,462,400
----------- ----------- -----------
PROCESS INDUSTRIES 1.5%
ChemFirst Inc. ............................... 85,100 2,068,994 -- -- 85,100 2,068,994
a CUNO Inc. .................................... 29,000 554,625 1,600 30,600 30,600 585,225
Optical Coating Laboratory Inc. .............. 24,600 2,057,175 2,100 175,613 26,700 2,232,788
----------- ----------- -----------
4,680,794 206,213 4,887,007
----------- ----------- -----------
PRODUCER MANUFACTURING 3.6%
a Gentex Corp. ................................. 127,800 3,578,400 5,400 151,200 133,200 3,729,600
Gibraltar Steel Corp. ........................ 100,000 2,475,000 2,800 69,300 102,800 2,544,300
JLG Industries Inc. .......................... 111,400 2,269,775 6,000 122,250 117,400 2,392,025
a Polycom Inc. ................................. 10,800 421,200 6,500 253,500 17,300 674,700
Reliance Steel & Aluminum Co. ................ 9,000 351,000 -- -- 9,000 351,000
Roper Industries Inc. ........................ 57,400 1,836,800 4,600 147,200 62,000 1,984,000
----------- ----------- -----------
10,932,175 743,450 11,675,625
----------- ----------- -----------
REAL ESTATE 3.6%
Arden Realty Inc. ............................ 86,000 2,117,750 3,000 73,875 89,000 2,191,625
Camden Property Trust ........................ 75,000 2,081,250 3,600 99,900 78,600 2,181,150
Colonial Properties Trust .................... 15,400 435,050 -- -- 15,400 435,050
FelCor Lodging Trust Inc. .................... 50,000 1,037,500 800 16,600 50,800 1,054,100
Glenborough Realty Trust Inc. ................ 54,100 946,750 3,000 52,500 57,100 999,250
Innkeepers USA Trust ......................... 98,900 989,000 -- -- 98,900 989,000
MeriStar Hospitality Corp. ................... 130,000 2,916,875 8,000 179,500 138,000 3,096,375
SL Green Realty Corp. ........................ 30,900 631,519 -- -- 30,900 631,519
----------- ----------- -----------
11,155,694 422,375 11,578,069
----------- ----------- -----------
RETAIL TRADE 1.1%
a Beyond.com Corp. ............................. 54,500 1,563,469 1,300 37,294 55,800 1,600,763
Claire's Stores Inc. ......................... 34,000 871,250 6,700 171,688 40,700 1,042,938
a Guitar Center Inc. ........................... 55,000 574,063 2,500 26,094 57,500 600,157
a The Men's Wearhouse Inc. ..................... -- -- 8,000 204,000 8,000 204,000
----------- ----------- -----------
3,008,782 439,076 3,447,858
----------- ----------- -----------
a TECHNOLOGY SERVICES 20.2%
Affiliated Computer Services Inc., A ......... 135,300 6,849,563 7,000 354,375 142,300 7,203,938
Ask Jeeves Inc. .............................. -- -- 100 1,400 100 1,400
AppNet Systems Inc. .......................... -- -- 3,900 52,406 3,900 52,406
BackWeb Technologies Ltd. .................... 1,100 30,113 100 2,738 1,200 32,851
Brightpoint Inc. ............................. 12,900 78,206 2,100 12,731 15,000 90,937
Brio Technology Inc. ......................... 13,000 260,000 -- -- 13,000 260,000
BroadVision Inc. ............................. 26,600 1,961,750 1,200 88,500 27,800 2,050,250
Check Point Software Technologies Ltd. ....... 11,700 627,413 -- -- 11,700 627,413
Citrix Systems Inc. .......................... 37,800 2,135,700 1,400 79,100 39,200 2,214,800
Complete Business Solutions Inc. ............. 69,600 1,248,450 10,000 179,375 79,600 1,427,825
Concord Communications Inc. .................. 30,000 1,350,000 1,000 45,000 31,000 1,395,000
Cybersourc Corp. ............................. -- -- 600 8,850 600 8,850
Deltek Systems Inc. .......................... 13,800 136,275 300 2,963 14,100 139,238
Digital Island Inc. .......................... -- -- 1,000 17,938 1,000 17,938
Documentum Inc. .............................. 40,000 522,500 1,500 19,594 41,500 542,094
DoubleClick Inc. ............................. 19,100 1,752,425 600 55,050 19,700 1,807,475
Entrust Technologies Inc. .................... 55,200 1,835,400 3,000 99,750 58,200 1,935,150
Exodus Communications Inc. ................... 9,600 1,151,400 1,200 143,925 10,800 1,295,325
High Speed Access Corp. ...................... 9,600 246,000 600 15,375 10,200 261,375
HNC Software Inc. ............................ 90,000 2,773,125 4,000 123,250 94,000 2,896,375
i2 Technologies Inc. ......................... 117,600 5,056,800 6,800 292,400 124,400 5,349,200
Integrated Systems Inc. ...................... 98,100 1,152,675 400 4,700 98,500 1,157,375
International Network Services ............... 88,200 3,561,075 5,500 222,063 93,700 3,783,138
See accompanying notes to pro forma combining financial statements.
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COMMON STOCKS AND RIGHTS (CONT.)
a TECHNOLOGY SERVICES (CONT.)
Intuit Inc. .................................. 21,800 $ 1,964,725 800 $ 72,100 22,600 $ 2,036,825
ISS Group Inc. ............................... 8,000 302,000 400 15,100 8,400 317,100
Keane Inc. ................................... 30,000 678,750 1,600 36,200 31,600 714,950
Legato Systems Inc. .......................... 39,200 2,263,800 3,300 190,575 42,500 2,454,375
Marimba Inc. ................................. 900 47,419 100 5,269 1,000 52,688
Media Metrix Inc. ............................ 13,900 740,175 700 37,275 14,600 777,450
Micromuse Inc. ............................... 57,000 2,842,875 2,340 116,708 59,340 2,959,583
MicroStrategy Inc. ........................... 19,500 738,563 300 11,363 19,800 749,926
Mpath Interactive Inc. ....................... 2,000 44,000 100 2,200 2,100 46,200
Proxicom Inc. ................................ 8,400 215,775 300 7,706 8,700 223,481
Sapient Corp. ................................ 41,300 2,338,613 3,000 169,875 44,300 2,508,488
Serena Software Inc. ......................... 22,200 298,313 500 6,719 22,700 305,032
Software.com Inc. ............................ -- -- 500 11,594 500 11,594
SS&C Technologies Inc. ....................... 2,800 21,350 -- -- 2,800 21,350
StarMedia Network Inc. ....................... 23,500 1,506,938 1,300 83,363 24,800 1,590,301
Sykes Enterprises Inc. ....................... 5,300 176,888 800 26,700 6,100 203,588
TenFold Corp. ................................ 3,400 107,950 200 6,350 3,600 114,300
Transaction Systems Architects Inc., A ....... 42,000 1,638,000 -- -- 42,000 1,638,000
Vantive Corp. ................................ 50,400 576,450 -- -- 50,400 576,450
Verio Inc. ................................... 56,000 3,892,000 2,800 194,600 58,800 4,086,600
VERITAS Software Corp. ....................... 35,000 3,322,813 2,400 227,850 37,400 3,550,663
Vignette Corp. ............................... 13,800 1,035,000 1,500 112,500 15,300 1,147,500
Whittman-Hart Inc. ........................... 55,500 1,762,125 6,600 209,550 62,100 1,971,675
Wind River Systems Inc. ...................... 121,050 1,944,366 4,250 68,266 125,300 2,012,632
----------- ----------- -----------
61,187,758 3,433,346 64,621,104
----------- ----------- -----------
a TELECOMMUNICATIONS 5.9%
AT&T Canada Inc., B (Canada) ................. 7,300 467,656 200 12,813 7,500 480,469
Clearnet Communications Inc., A
(Canada) .................................... 19,300 268,994 1,200 16,725 20,500 285,719
ICG Communications Inc. ...................... 126,000 2,693,250 5,000 106,875 131,000 2,800,125
ITC DeltaCom Inc. ............................ 18,500 518,000 900 25,200 19,400 543,200
Millicom International Cellular SA
(Luxembourg) ................................ 58,100 1,830,150 3,400 107,100 61,500 1,937,250
Pacific Gateway Exchange Inc. ................ 54,300 1,581,488 -- -- 54,300 1,581,488
Pinnacle Holdings Inc. ....................... 65,600 1,607,200 2,100 51,450 67,700 1,658,650
Primus Telecommunications Group Inc. ......... 87,800 1,970,013 1,700 38,144 89,500 2,008,157
Rhythms NetConnections Inc. .................. 2,900 169,288 100 5,838 3,000 175,126
Rural Cellular Corp., A ...................... 109,300 2,186,000 -- -- 109,300 2,186,000
Time Warner Telecom Inc. ..................... 11,000 319,000 600 17,400 11,600 336,400
VoiceStream Wireless Corp. ................... 83,100 2,363,156 3,000 85,313 86,100 2,448,469
Western Wireless Corp., A .................... 83,100 2,243,685 3,000 80,980 86,100 2,324,665
----------- ----------- -----------
18,217,880 547,838 18,765,718
----------- ----------- -----------
TRANSPORTATION 3.2%
Air Express International Corp. .............. 60,000 1,522,500 1,400 35,525 61,400 1,558,025
a Alaska Air Group Inc. ........................ -- -- 2,200 91,850 2,200 91,850
a Atlantic Coast Airlines Holdings Inc. ........ 121,000 2,299,000 3,000 57,000 124,000 2,356,000
C.H. Robinson Worldwide Inc. ................. 72,600 2,668,050 4,500 165,375 77,100 2,833,425
Expeditors International of
Washington Inc. ............................. 109,600 2,986,600 9,000 245,250 118,600 3,231,850
a Mesaba Holdings Inc. ......................... 12,900 164,475 -- -- 12,900 164,475
----------- ----------- -----------
9,640,625 595,000 10,235,625
----------- ----------- -----------
TOTAL LONG TERM INVESTMENTS
(COST $260,455,695) ......................... 290,107,691 17,023,661 307,131,352
----------- ----------- -----------
See accompanying notes to pro forma combining financial statements.
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PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
b REPURCHASE AGREEMENT 6.7%
Joint Repurchase Agreement,
4.767%, 7/01/99,
(Maturity Value $21,368,951)
(COST $21,366,121) .......................... $ 18,106,327 $18,106,327 $ 3,259,794 $ 3,259,794 $21,366,121 $21,366,121
Barclays Capital Inc. ......................
(Maturity Value $2,695,480)
Bear, Stearns & Co. Inc. ...................
(Maturity Value $2,377,933)
Chase Securities Inc. ......................
(Maturity Value $440,201)
CIBC Oppenheimer Corp. .....................
(Maturity Value $2,695,480)
Donaldson, Lufkin & Jenrette
Securities Corp. .........................
(Maturity Value $1,902,692)
Dresdner Kleinwort Benson,
North America LLC
(Maturity Value $1,902,692)
Goldman, Sachs & Co. .......................
(Maturity Value $950,917)
NationsBanc Montgomery
Securities LLC
(Maturity Value $1,902,692)
Paine Webber Inc. ..........................
(Maturity Value $1,902,692)
Paribas Corp. ..............................
(Maturity Value $1,902,692)
Warburg Dillon Read LLC
(Maturity Value $2,695,480)
Collateralized by U.S. Treasury
Bills & Notes
----------- ----------- -----------
TOTAL INVESTMENTS
(COST $281,821,816) 102.8% .................... 308,214,018 20,283,455 328,497,473
OTHER ASSETS, LESS LIABILITIES (2.8%) ........ (8,958,782) 67,017 (8,891,765)
----------- ----------- -----------
NET ASSETS 100.0% ............................ $299,255,236 $20,350,472 $319,605,708
=========== =========== ===========
</TABLE>
a Non-income producing.
b Investment is through participation in a joint account with other funds
managed by the investment advisor. At 6/30/99, all repurchase agreements
had been entered into on that date.
See accompanying notes to pro forma combining financial statements.
17
<PAGE>
VIP SMALL CAP FUND
TVP SMALL CAP INVESTMENTS FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
VIP TVP SMALL CAP FUND
SMALL CAP SMALL CAP PRO FORMA
FUND INVESTMENTS FUND COMBINED
--------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ........................................................... $246,346,501 $ 14,109,194 $260,455,695
--------------------------------------------------------
Value .......................................................... 290,107,691 17,023,661 307,131,352
Repurchase agreements, at value and cost ........................ 18,106,327 3,259,794 21,366,121
Receivables:
Investment securities sold .................................... 846,042 84,288 930,330
Capital shares sold ........................................... 450,470 96,826 547,296
Dividends and interest ........................................ 147,406 5,151 152,557
--------------------------------------------------------
Total assets ............................................... 309,657,936 20,469,720 330,127,656
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................ 537,835 56,057 593,892
Affiliates ..................................................... 179,512 20,960 200,472
Custodian fees ................................................. 1,757 -- 1,757
Postage and mailing fees ....................................... 9,648 -- 9,648
Payable upon return of securities loaned ........................ 9,656,982 -- 9,656,982
Other liabilities ............................................... 16,966 42,231 59,197
--------------------------------------------------------
Total liabilities .......................................... 10,402,700 119,248 10,521,948
--------------------------------------------------------
Net assets, at value ...................................... $299,255,236 $ 20,350,472 $319,605,708
--------------------------------------------------------
CLASS 1 :
Net assets, at value ............................................ $299,177,022 $ 482,735 $299,659,757
========================================================
Shares outstanding** ............................................ 18,724,755 44,934 18,754,964
========================================================
Net asset value and offering price per share .................... $ 15.98 $ 10.74 $ 15.98
========================================================
CLASS 2 :
Net assets, at value ............................................ $ 78,214 $ 19,867,737 $ 19,945,951
========================================================
Shares outstanding** ............................................ 4,903 1,852,384 1,250,529
========================================================
Net asset value and offering price per share .................... $ 15.95 $ 10.73 $ 15.95
========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
18
<PAGE>
VIP SMALL CAP FUND
TVP SMALL CAP INVESTMENTS FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
VIP TVP SMALL CAP FUND
SMALL CAP SMALL CAP PRO FORMA PRO FORMA
FUND INVESTMENTS FUND ADJUSTMENTS COMBINED
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends ................................................. $ 695,579 $ 17,563 -- $ 713,142
Interest .................................................. 321,047 60,320 -- 381,367
------------------------------------------------------------------
Total investment income .............................. 1,016,626 77,883 -- 1,094,509
------------------------------------------------------------------
Expenses:
Management fees ........................................... 1,101,012 45,181 77,159 1 1,223,352
Administrative fees ....................................... -- 7,322 (7,322)2 --
Distribution fees - Class 2 ............................... 32 14,812 (5) 14,839
Custodian fees ............................................ 1,757 98 -- 1,855
Reports to shareholders ................................... 19,744 4,685 -- 24,429
Registration and filing fees .............................. -- 262 -- 262
Professional fees ......................................... 7,859 1,135 -- 8,994
Trustees' fees and expenses ............................... 1,228 1,808 -- 3,036
Other ..................................................... 3,105 5,413 -- 8,518
------------------------------------------------------------------
Total expenses ....................................... 1,134,737 80,716 69,832 1,285,285
Expenses waived/paid by affiliate .................... -- (6,115) 6,115 3 --
------------------------------------------------------------------
Net expenses ........................................ 1,134,737 74,601 75,947 1,285,285
------------------------------------------------------------------
Net investment income (loss) ....................... (118,111) 3,282 (75,947) (190,776)
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ........................ 15,619,206 369,105 -- 15,988,311
Net unrealized depreciation on investments ................ 27,500,843 2,449,410 -- 29,950,253
------------------------------------------------------------------
Net realized and unrealized gain ........................... 43,120,049 2,818,515 -- 45,938,564
------------------------------------------------------------------
Net increase in net assets resulting from operations ....... $ 43,001,938 $ 2,821,797 $ (75,947) $ 45,747,788
==================================================================
</TABLE>
1 Pro Forma adjustment for difference in Management fee schedule. Apart from
the reorganization, the shareholders of the VIP Franklin Small Cap Fund
are voting to approve a new investment advisory agreement with Management
fees of .80% of the first $500 million. Fees are reduced on net assets
over $500 million.
2 Under an agreement with Advisers, FT Services will provide administrative
services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers
based on average daily net assets, and is not an additional expense of the
Pro Forma Combined VIP Fund.
3 The Pro Forma adjustment to remove TVP Small Cap Investments expense
limitation.
See accompanying notes to pro forma combining financial statements.
19
<PAGE>
VIP SMALL CAP FUND
TVP SMALL CAP INVESTMENTS FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP
VIP TVP SMALL CAP FUND
SMALL CAP SMALL CAP PRO FORMA PRO FORMA
FUND INVESTMENTS FUND 2 ADJUSTMENTS COMBINED
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:1
Dividends ......................................................... $ 2,319,218 $ 6,742 $ -- $ 2,325,960
Interest .......................................................... 1,708,834 23,149 -- 1,731,983
-----------------------------------------------------------
Total investment income ...................................... 4,028,052 29,891 -- 4,057,943
-----------------------------------------------------------
Expenses:
Management fees ................................................... 2,365,309 7,524 157,129 3 2,529,962
Administrative fees ............................................... -- 1,450 (1,450)4 --
Distribution fees - Class 2 ....................................... -- 2,112 -- 2,112
Custodian fees .................................................... 4,422 100 -- 4,522
Reports to shareholders ........................................... 34,998 4,900 -- 39,898
Registration and filing fees ...................................... -- 275 -- 275
Professional fees ................................................. 13,196 1,350 -- 14,546
Trustees' fees and expenses ....................................... 2,123 1,900 -- 4,023
Other ............................................................. 4,592 103 -- 4,695
-----------------------------------------------------------
Total expenses ............................................... 2,424,640 19,714 155,679 2,600,033
Expenses waived/paid by affiliate ............................ -- (7,529) 7,529 5 --
-----------------------------------------------------------
Net expenses ............................................... 2,424,640 12,185 163,208 2,600,033
-----------------------------------------------------------
Net Investment Income ..................................... 1,603,412 17,706 (163,208) 1,457,910
-----------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................... (193,079) 182,914 -- (10,165)
Foreign currency transactions .................................... (36,347) -- -- (36,347)
-----------------------------------------------------------
Net Realized gain (loss) ................................... (229,426) 182,914 -- (46,512)
-----------------------------------------------------------
Net unrealized appreciation (depreciation) on investments ......... (8,381,265) 465,057 -- (7,916,208)
-----------------------------------------------------------
Net realized and unrealized gain (loss) ............................ (8,610,691) 647,971 -- (7,962,720)
-----------------------------------------------------------
Net increase(decrease) in net assets resulting from operations ..... $(7,007,279) $ 665,677 $ (163,208) $(6,504,810)
===========================================================
</TABLE>
1 Net of foreign taxes of $445,131 for the VIP Small Cap Fund.
2 For the period from May 1, 1998 to December 31, 1998
3 Pro Forma adjustment for the difference in Management fee schedule. Apart
from the reorganization, the shareholders of the VIP Small Cap Fund are
voting to approve a new investment advisory agreement with Management fees
of .80% of the first $500 million. Fees are reduced on net assets over
$500 million.
4 Under an agreement with Advisers, FT Services will provide administrative
services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers
based on average daily net assets, and is not an additional expense of the
Pro Forma Combined VIP Fund.
5 The Pro Forma adjustment to remove the TVP Small Cap Investments expense
limitation.
See accompanying notes to pro forma combining financial statements.
20
<PAGE>
VIP SMALL CAP FUND
TVP SMALL CAP INVESTMENTS FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION:
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Small Cap Investments
Fund ("Small Cap Investments Fund"), the Franklin Small Cap Fund ("Small Cap
Fund") will acquire all the net assets of the Small Cap Investments Fund Class 1
and 2 in exchange for the Classes 1 and 2 shares, respectively, of Small Cap
Fund. The merger will be accounted for by the method of accounting for tax free
business combinations of investment companies. The pro forma combining Statement
of Assets and Liabilities reflects the financial position of Small Cap Fund and
Small Cap Investments Fund at June 30, 1999 as though the merger occurred as of
that date. The pro forma combining Statement of Operations reflects the results
of operations of the Small Cap Fund and the Small Cap Investments Fund for the
period January 1, 1999 to June 30, 1999 as though the merger occurred on January
1, 1999. The pro forma financial statements do not reflect the expenses of
either fund in carrying out its obligations under the Agreement and Plan of
Reorganization or any adjustment with respect to additional distributions that
may be made prior to reorganization. The pro forma financial statements are
presented for the information of the reader, and should be read in conjunction
with the historical financial statements of the funds.
2. SHARES OF BENEFICIAL INTEREST:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Small Cap Investments Fund at June 30, 1999 by the
Class 1 and 2 net asset value per share of the VIP Small Cap Fund, respectively
at June 30, 1999.
21
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
--------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 78.2%
AEROSPACE & MILITARY TECHNOLOGY 3.2%
a Coltec Industries Inc. ................. 2,150 $ 46,628 168,800 $ 3,660,850 170,950 $ 3,707,478
a Hexcel Corp. ........................... -- -- 42,000 425,250 42,000 425,250
a Lockheed Martin Corp. .................. 2,203 82,062 223,300 8,317,925 225,503 8,399,987
Northrop Grumman Corp. ................. 627 41,578 48,000 3,183,000 48,627 3,224,578
------------- ----------- -----------
170,268 15,587,025 15,757,293
------------- ----------- -----------
APPLIANCES & HOUSEHOLD DURABLES .6%
Premark International Inc. ............. 1,500 56,250 79,500 2,981,250 81,000 3,037,500
------------- ----------- -----------
AUTOMOBILES 4.5%
Borg-Warner Automotive Inc. ............ 50,000 2,750,000 -- -- 50,000 2,750,000
a Consorcio G Grupo Dina SA de CV, L,
ADR 635,600 556,150 -- -- 635,600 556,150
Delphi Automotive Systems Corp. ........ 3,653 67,809 254,557 4,725,214 258,210 4,793,023
a General Motors Corp. ................... 520 34,320 86,900 5,735,400 87,420 5,769,720
a Lear Corp. ............................. 796 39,601 95,500 4,751,125 96,296 4,790,726
TRW Inc. ............................... 1,106 60,692 70,400 3,863,200 71,506 3,923,892
------------- ----------- -----------
202,422 22,381,089 22,583,511
------------- ----------- -----------
BANKING 6.9%
Bank One Corp. ......................... 774 46,101 216,600 12,901,238 217,374 12,947,339
Banknorth Group Inc. ................... -- -- 8,900 293,700 8,900 293,700
Chase Manhattan Corp. .................. 425 36,816 75,600 6,548,850 76,025 6,585,666
First American Corp. Tennessee ......... 400 16,625 30,900 1,284,281 31,300 1,300,906
First Union Corp. ...................... 2,000 94,000 211,882 9,958,454 213,882 10,052,454
Peoples Heritage Financial Group Inc. .. 100 1,881 40,800 767,550 40,900 769,431
U.S. Bancorp ........................... 800 27,200 74,600 2,536,400 75,400 2,563,600
Western Bancorp ........................ -- -- 4,200 182,700 4,200 182,700
------------- ----------- -----------
222,623 34,473,173 34,695,796
------------- ----------- -----------
BEVERAGES & TOBACCO 3.2%
Allied Domecq PLC ...................... -- -- 118,400 1,144,958 118,400 1,144,958
Gallaher Group PLC ..................... 5,400 33,196 293,500 1,804,246 298,900 1,837,442
Gallaher Group PLC, ADR ................ -- -- 14,300 349,456 14,300 349,456
Nabisco Group Holdings Corp. ........... 100 1,956 74,600 1,459,363 74,700 1,461,319
Philip Morris Companies Inc. ........... 800 32,150 164,500 6,610,844 165,300 6,642,994
UST Inc. ............................... 550 16,088 149,500 4,372,875 150,050 4,388,963
------------- ----------- -----------
83,390 15,741,742 15,825,132
------------- ----------- -----------
BROADCASTING & PUBLISHING 6.9%
a AT&T Corp. - Liberty Media Group, A .... -- -- 78,648 2,890,314 78,648 2,890,314
Central Newspapers Inc., A ............. 1,600 60,200 115,900 4,360,738 117,500 4,420,938
Dow Jones & Co. Inc. ................... -- -- 67,800 3,597,638 67,800 3,597,638
Media General Inc., A .................. -- -- 53,900 2,748,900 53,900 2,748,900
a MediaOne Group Inc. .................... 600 44,625 108,900 8,099,438 109,500 8,144,063
Meredith Corp. ......................... 500 17,313 41,100 1,423,088 41,600 1,440,401
NV Holdingsmig de Telegraaf ............ 1,468 28,915 -- -- 1,468 28,915
Scripps Co., A ......................... 1,485 70,630 121,400 5,774,088 122,885 5,844,718
Washington Post Co., B ................. 103 55,388 10,100 5,431,275 10,203 5,486,663
------------- ----------- -----------
277,071 34,325,479 34,602,550
------------- ----------- -----------
BUILDING MATERIALS & COMPONENTS .9%
a American Standard Companies Inc. ....... 650 31,200 78,800 3,782,400 79,450 3,813,600
Armstrong World Industries Inc. ........ 320 18,500 15,100 872,969 15,420 891,469
------------- ----------- -----------
49,700 4,655,369 4,705,069
------------- ----------- -----------
BUSINESS & PUBLIC SERVICES 1.5%
Hillenbrand Industries Inc. ............ 1,700 73,525 12,400 536,300 14,100 609,825
a Republic Services Inc. ................. 90 16,233 24,700 611,325 24,790 627,558
Suez Lyonnaise des Eaux SA ............. -- -- 34,849 6,285,542 34,849 6,285,542
------------- ----------- -----------
89,758 7,433,167 7,522,925
------------- ----------- -----------
CHEMICALS 1.3%
Arch Chemicals Inc. .................... -- -- 54,500 1,325,031 54,500 1,325,031
Crompton & Knowles Corp. ............... 2,500 48,906 84,200 1,647,163 86,700 1,696,069
a Cytec Industries Inc. .................. -- -- 48,700 1,552,313 48,700 1,552,313
Olin Corp. ............................. 855 11,275 104,900 1,383,369 105,755 1,394,644
See accompanying notes to pro forma combining financial statements.
22
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
--------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
CHEMICALS (CONT.)
a W.R. Grace & Co. ....................... -- -- 19,700 $ 361,988 19,700 $ 361,988
Witco Corp. ............................ -- -- 12,300 246,000 12,300 246,000
------------- ----------- -----------
$ 60,181 6,515,864 6,576,045
------------- ----------- -----------
DATA PROCESSING & REPRODUCTION .1%
a Cadence Design Systems Inc. ............ -- -- 43,600 577,575 43,600 577,575
------------- ----------- -----------
ELECTRICAL & ELECTRONICS .1%
Honeywell Inc. ......................... -- -- 1,700 196,988 1,700 196,988
a Level One Communications Inc. .......... -- -- 4,000 195,750 4,000 195,750
------------- ----------- -----------
-- 392,738 392,738
------------- ----------- -----------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
a Quantum Corp. .......................... 2,000 48,250 44,300 1,068,738 46,300 1,116,988
------------- ----------- -----------
ENERGY EQUIPMENT & SERVICES 1.1%
Baker Hughes Inc. ...................... -- -- 30,000 1,005,000 30,000 1,005,000
a Cooper Cameron Corp. ................... 690 25,573 68,900 2,553,606 69,590 2,579,179
a Weatherford International Inc. ......... 900 32,963 48,750 1,785,469 49,650 1,818,432
------------- ----------- -----------
58,536 5,344,075 5,402,611
------------- ----------- -----------
ENERGY SOURCES 1.9%
Atlantic Richfield Co. ................. -- -- 11,800 986,038 11,800 986,038
Shell Transport & Trading Co. PLC ...... 2,130 15,956 521,300 3,905,107 523,430 3,921,063
Societe Elf Aquitaine SA, Br ........... 275 40,355 29,650 4,351,031 29,925 4,391,386
------------- ----------- -----------
56,311 9,242,176 9,298,487
------------- ----------- -----------
FINANCIAL SERVICES 9.1%
Bear Stearns Co. Inc. .................. 1,525 71,294 124,775 5,833,231 126,300 5,904,525
CIT Group Inc., A ...................... 1,700 49,087 119,300 3,444,788 121,000 3,493,875
Finova Group Inc. ...................... -- -- 26,500 1,394,563 26,500 1,394,563
Greenpoint Financial Corp. ............. 1,228 40,294 146,430 4,804,734 147,658 4,845,028
Greenpoint Financial Corp., 144A ....... -- -- 3,800 124,688 3,800 124,688
Hell Financial Inc. .................... 1,200 33,375 -- -- 1,200 33,375
Household International Inc. ........... 735 34,821 133,730 6,335,459 134,465 6,370,280
a Laser Mortgage Management Inc. ......... -- -- 186,700 641,781 186,700 641,781
Lehman Brothers Holdings Inc. .......... 1,200 74,700 94,000 5,851,500 95,200 5,926,200
Liberty Financial Cos. Inc. ............ 2,347 68,356 2,347 -- -- 68,356
a MFN Financial Corp. .................... -- -- 39,765 395,167 39,765 395,167
Morgan Stanley, Dean Witter & Co. ...... -- -- 28,400 2,911,000 28,400 2,911,000
Newcourt Credit Group Inc. ............. 985 12,743 1,900 24,862 2,885 37,605
Newcourt Credit Group Inc., fgn ........ -- -- 104,000 1,345,500 104,000 1,345,500
Power Financial Corp. .................. -- -- 10,700 204,715 10,700 204,715
The PMI Group Inc. ..................... -- -- 56,900 3,574,031 56,900 3,574,031
United Asset Management Corp. .......... 1,700 38,675 362,000 8,235,500 363,700 8,274,175
------------- ----------- -----------
423,345 45,121,519 45,544,864
------------- ----------- -----------
FOOD & HOUSEHOLD PRODUCTS 1.7%
a Fine Host Corp. ........................ -- -- 139,062 1,529,682 139,062 1,529,682
U.S. Industries Inc. ................... 4,050 68,850 248,300 4,221,100 252,350 4,289,950
Van Melle NV ........................... -- -- 45,490 2,920,236 45,490 2,920,236
------------- ----------- -----------
68,850 8,671,018 8,739,868
------------- ----------- -----------
FOREST PRODUCTS & PAPER 1.4%
Rayonier Inc. .......................... -- -- 107,400 5,349,863 107,400 5,349,863
St. Joe Co. ............................ 750 37,359 55,400 1,495,800 56,150 1,533,159
------------- ----------- -----------
37,359 6,845,663 6,883,022
------------- ----------- -----------
HEALTH & PERSONAL CARE 4.1%
a Beverly Enterprises Inc. ............... -- -- 166,400 1,341,600 166,400 1,341,600
a Foundation Health Systems, A ........... -- -- 142,170 2,132,550 142,170 2,132,550
a Healthsouth Corp. ...................... -- -- 181,800 2,715,638 181,800 2,715,638
McKesson HBOC Inc. ..................... -- -- 47,800 1,535,575 47,800 1,535,575
a Pacificare Health Systems Inc. ......... 500 35,969 48,700 3,503,356 49,200 3,539,325
Rhone-Poulenc SA, A .................... 1,647 75,259 112,800 5,154,345 114,447 5,229,604
Sankyo Co. Ltd. ........................ -- -- 11,600 292,300 11,600 292,300
See accompanying notes to pro forma combining financial statements.
23
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
--------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE (CONT.)
a Tenet Healthcare Corp. ................. -- -- 198,100 $ 3,677,231 198,100 $ 3,677,231
Ventas Inc. ............................ -- -- 31,800 170,925 31,800 170,925
------------- ----------- -----------
$ 111,228 20,523,520 20,634,748
------------- ----------- -----------
INDUSTRIAL COMPONENTS 1.9%
a Owens-Illinois Inc. .................... 2,000 65,375 206,600 6,753,238 208,600 6,818,613
a Thermo Electron Corp. .................. -- -- 132,600 2,660,288 132,600 2,660,288
------------- ----------- -----------
65,375 9,413,526 9,478,901
------------- ----------- -----------
INSURANCE 1.6%
Allmerica Financial Corp. .............. -- -- 49,900 3,034,544 49,900 3,034,544
American Bankers Insurance
Group Inc. ........................... -- -- 10,300 560,706 14,600 635,150
a Old Republic International Corp. ....... 4,300 74,444 11,700 202,556 11,700 202,556
Provident Companies Inc. ............... -- -- 11,800 472,000 11,800 472,000
Sampo Insurance Co. PLC., A ............ -- -- 6,800 197,051 6,800 197,051
Torchmark Corp. ........................ -- -- 36,400 1,242,150 36,400 1,242,150
White Mountain Insurance Group Inc. .... -- 15,600 2,199,600 15,600 2,199,600
------------- ----------- -----------
74,444 7,908,607 7,983,051
------------- ----------- -----------
LEISURE & TOURISM 3.3%
a Park Place Entertainment Corp. ......... 1,600 15,500 301,000 2,915,938 302,600 2,931,438
Pathe SA ............................... -- -- 28,500 3,421,058 28,500 3,421,058
a Promus Hotel Corp. ..................... 3,740 115,940 171,200 5,307,200 174,940 5,423,140
Starwood Hotels & Resorts
Worldwide Inc. ....................... 1,375 42,023 157,000 4,798,313 158,375 4,840,336
------------- ----------- -----------
173,463 16,442,509 16,615,972
------------- ----------- -----------
MACHINERY & ENGINEERING 1.2%
Case Corp. ............................. -- -- 8,200 394,625 8,200 394,625
Invensys PLC ........................... 17,760 84,122 1,206,152 5,713,071 1,223,912 5,797,193
------------- ----------- -----------
84,122 6,107,696 6,191,818
------------- ----------- -----------
MERCHANDISING 3.9%
a Barney's Inc. .......................... -- -- 45,635 410,715 45,635 410,715
a Barney's Inc., wts ..................... -- -- 11,018 26,994 11,018 26,994
a Federated Department Stores Inc. ....... 954 50,502 88,700 4,695,556 89,654 4,746,058
JC Penney Co. Inc. ..................... 858 41,667 100,900 4,899,956 101,758 4,941,623
a Payless Shoesource Inc. ................ 680 36,380 51,100 2,733,850 51,780 2,770,230
Rite Aid Corp. ......................... 1,876 46,197 170,600 4,201,025 172,476 4,247,222
a Toys R Us Inc. ......................... 1,880 38,892 122,070 2,525,323 123,950 2,564,215
------------- ----------- -----------
213,638 19,493,419 19,707,057
------------- ----------- -----------
METALS & MINING .4%
Allegheny Teledyne Inc. ................ -- -- 95,680 2,164,760 95,680 2,164,760
------------- ----------- -----------
MULTI-INDUSTRY 8.3%
a Alleghany Corp. ........................ 319 59,015 15,558 2,878,230 15,877 2,937,245
a Berkshire Hathaway Inc. ................ -- -- 22 49,280 22 49,280
a Berkshire-Hathaway Inc., A ............. -- -- 57 3,927,300 57 3,927,300
Compagnie Financiere Richemont AG,
Br., A ............................... 22 42,313 2,390 4,596,745 2,412 4,639,058
Compagnie Generale D'Industrie et
de Participation ..................... 990 47,881 57,210 2,766,989 58,200 2,814,870
Corporacion Financiera Alba SA ......... 240 38,857 19,000 3,076,209 19,240 3,115,066
Investor AB, A ......................... 1,100 12,097 658,360 7,240,256 659,460 7,252,353
Investor AB, B ......................... 2,580 28,829 652,800 7,294,284 655,380 7,323,113
Kansas City Southern Industries Inc. ... -- -- 38,900 2,482,306 38,900 2,482,306
Kinnevik AB, B ......................... -- -- 10,200 191,955 10,200 191,955
Lagardere SCA .......................... -- -- 95,862 3,568,751 95,862 3,568,751
Ogden Corp. ............................ 1,300 35,019 88,500 2,383,969 89,800 2,418,988
Power Corp. of Canada .................. -- -- 29,400 566,505 29,400 566,505
------------- ----------- -----------
264,011 41,022,779 41,286,790
------------- ----------- -----------
REAL ESTATE .4%
a Alexander's Inc. ....................... -- -- 8,000 591,000 8,000 591,000
a Cadillac Fairview Corp. ................ -- -- 62,000 1,175,606 62,000 1,175,606
See accompanying notes to pro forma combining financial statements.
24
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
--------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
REAL ESTATE (CONT.)
ac Security Capital European Realty ....... -- $ -- 23,055 $ 399,479 23,055 $ 399,479
------------- ----------- -----------
-- -- 2,166,085 2,166,085
------------- ----------- -----------
TELECOMMUNICATIONS 4.5%
BCE Inc. ............................... -- -- 45,750 2,242,954 45,750 2,242,954
General Motors Corp., H ................ -- -- 25,500 1,434,375 25,500 1,434,375
a Telecom Italia SpA, di Risp ............ -- -- 486,200 2,644,844 486,200 2,644,844
Telephone & Data Systems Inc. .......... 675 49,317 142,900 10,440,631 143,575 10,489,948
a United States Cellular Corp. ........... -- -- 85,100 4,552,850 85,100 4,552,850
Vodafone Airtouch PLC, ADR ............. -- -- (30,950) 994,850 (30,950) 994,850
------------- ----------- -----------
49,317 22,310,504 22,359,821
TEXTILES & APPAREL .6%
Liz Claiborne Inc. ..................... 1,400 51,100 77,300 2,821,450 78,700 2,872,550
------------- ----------- -----------
TRANSPORTATION 2.3%
Burlington Northern Santa Fe Corp. ..... -- -- 53,200 1,649,200 53,200 1,649,200
Florida East Coast Industries Inc. ..... 500 22,125 114,500 5,066,625 115,000 5,088,750
ac Golden Ocean Group Ltd., wts ........... -- -- 1,120 -- 1,120 --
Railtrack Group PLC .................... -- -- 239,552 4,897,370 239,552 4,897,370
------------- ----------- -----------
22,125 11,613,195 11,635,320
------------- ----------- -----------
UTILITIES ELECTRICAL & GAS 1.1%
a Citizens Utilities Co., B .............. 6,443 71,678 -- -- 6,443 71,678
a MidAmerican Energy Holding Co. ......... 800 47,190 91,700 3,175,113 92,500 3,222,303
Veba AG ................................ -- -- 38,100 2,247,417 38,100 2,247,417
------------- ----------- -----------
118,868 5,422,530 5,541,398
------------- ----------- -----------
TOTAL COMMON STOCKS
(COST $338,565,570) .................... 3,132,005 -- 388,768,240 -- 391,900,245 --
PREFERRED STOCKS .6%
Embratel Participacoes SA, ADR, pfd .... -- -- 36,350 504,345 36,350 504,345
Tele Centro Sul Participacoes SA,
ADR, pfd ............................. 261 14,486 17,570 975,135 17,831 989,621
Tele Norte Leste Participacoes SA,
ADR, pfd ............................. 865 16,057 81,650 1,515,628 82,515 1,531,685
------------- ----------- -----------
TOTAL PREFERRED STOCKS
(COST $2,634,618) ...................... 30,543 2,995,108 3,025,651
------------- ----------- -----------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* AMOUNT* AMOUNT*
----------- ----------- -----------
BONDS 2.7%
Abraxas Petroleum Corp.,
11.50%, 11/01/04 ....................... $ -- -- $ 415,000 261,450 $ 415,000 261,450
Aiken Cnty S C Indl. Rev. Ref. Belott,
6.00%, 12/01/11 ........................ -- -- 45,000 27,450 45,000 27,450
Consorcio G Grupo Dina SA de CV, cvt.,
8.00%, 8/08/04 ......................... -- -- 4,250,000 2,125,000 4,250,000 2,125,000
Eurotunnel Finance Ltd., Equity
Note, 12/31/03 ......................... -- -- 481,406 371,818 481,406 371,818
Eurotunnel PLC:
12/31/12, Tier 1 ....................... -- -- 406,877 GBP 525,896 406,877 GBP 525,896
12/31/18, Tier 2 ....................... -- -- 1,051,800 GBP 1,226,840 1,051,800 GBP 1,226,840
12/31/25, Tier 3 ....................... -- -- 281,758 GBP 288,677 281,758 GBP 288,677
12/31/50, Resettable Advance R5 ........ -- -- 408,583 GBP 273,711 408,583 GBP 273,711
4/30/40, ptc loan note ................. -- -- 220,000 GBP 149,113 220,000 GBP 149,113
Stabilization Advance S8 Tier 1 ........ -- -- 70,043 GBP 26,497 70,043 GBP 26,497
Stabilization Advance S8 Tier 2 ........ -- -- 54,215 GBP 17,091 54,215 GBP 17,091
Eurotunnel SA:
5.28%, 7/07/02, Tier 1 ................. -- -- 46,223 EUR 38,610 46,223 EUR 38,610
5.28%, 7/07/02, Tier 2 ................. -- -- 133,474 EUR 101,857 133,474 EUR 101,857
5.28%, 7/07/02, Tier 3 ................. -- -- 166,595 EUR 109,952 166,595 EUR 109,952
See accompanying notes to pro forma combining financial statements.
25
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
EUROTUNNEL SA: (CONT.)
12/31/12, Tier 1 (Libor) ............... -- -- 155,834 EUR 130,170 155,834 EUR 130,170
12/31/18, Tier 2 (Libor) ............... -- -- 471,681 EUR 357,519 471,681 EUR 357,519
12/31/25, Tier 3 (Libor) ............... $ -- $ -- $367,578 EUR $242,601 $ 367,578 EUR $242,601
12/31/50, Resettable Advance R4 ........ -- -- 392,330 EUR 167,904 392,330 EUR 167,904
Eurotunnel Stabilization Facility
Stabilization Advance Tier 1 ........... -- -- 24,850 EUR 6,150 24,850 EUR 6,150
Stabilization Advance Tier 1 ........... -- -- 11,279 EUR 2,792 11,279 EUR 2,792
Stabilization Advance Tier 2 ........... -- -- 29,666 EUR 6,119 29,666 EUR 6,119
Golden Books Publishing,
7.65%, 9/15/02 ......................... -- -- 190,000 75,050 190,000 75,050
Hechinger Co., 6.95%, 10/15/03 ......... -- -- 1,702,000 178,710 1,702,000 178,710
HIH Capital Ltd., cvt., 7.50%, 9/25/06 . -- -- 1,235,000 845,975 1,235,000 845,975
Hvide Marine Inc., 8.375%, 2/15/08 ..... -- -- 170,000 82,450 170,000 82,450
Kelley Oil & Gas Corp. .................
144A, 14.00%, 4/15/03 .................. -- -- 190,000 195,700 190,000 195,700
10.375%, 10/15/06 ...................... -- -- 95,000 54,625 95,000 54,625
Series D, 10.375%, 10/15/06 ............ -- -- 120,000 69,000 120,000 69,000
MFN Financial Corp.;
Series A, 10.00%, 4/23/01 .............. -- -- 158,828 150,092 158,828 150,092
Series B, 10.00%, 4/23/01 .............. -- -- 278,828 263,492 278,828 263,492
Port Seattle Wash. Rev. Ref-Beloit
Proj., 6.00%, 12/01/17 ................ -- -- 20,000 12,200 20,000 12,200
a Roil Limited, 12.779%, 12/05/02 ........ -- -- 2,328,000 814,800 2,328,000 814,800
Security Capital US Realty, cvt., 144A,
2.00%, 5/22/03 ......................... -- -- 2,208,000 1,698,780 2,208,000 1,698,780
Southwest Royalties Inc., B,
10.50%, 10/15/04 ....................... -- -- 1,475,000 715,375 1,475,000 715,375
Specialty Foods Corp.:
11.00%, 8/15/09 ........................ -- -- 111,297 11 111,297 11
13.25%, 8/15/09 ........................ -- -- 1,180,000 920,400 1,180,000 920,400
TFM SA de CV:
10.25%, 6/15/07 ........................ -- -- 250,000 221,875 250,000 221,875
0/11.75%, 6/15/09 ...................... -- -- 885,000 535,425 885,000 535,425
------------- ----------- -----------
TOTAL BONDS (COST $118,784,832) ........ -- 13,291,177 13,291,177
------------- ----------- -----------
BONDS & NOTES IN REORGANIZATION 2.9%
a Altos Hornos de Mexico SA:
5.50%, 12/15/01 ........................ -- -- 20,000 8,000 20,000 8,000
Series A, 11.375%, 4/30/02 ............. -- -- 95,000 42,750 95,000 42,750
Series B, 11.875%, 4/15/04 ............. -- -- 60,000 27,000 60,000 27,000
a APS Inc., bank claim ................... -- -- 242,324 104,199 242,324 104,199
a Brunos Inc., Bank Claim:
Revolver Commitment .................... -- -- 201,200 115,690 201,200 115,690
Tranche A .............................. -- -- 360,300 194,562 360,300 194,562
Tranche B .............................. -- -- 292,000 157,680 292,000 157,680
a Crown Leasing, Bank Claim .............. -- -- 87,565,976 JPY 114,847 87,565,976 JPY 114,847
a Decision One, Bank Claim:
Revolver Commitment .................... -- -- 266,219 116,471 266,219 116,471
Tranche A .............................. -- -- 477,294 208,816 477,294 208,816
Tranche B .............................. -- -- 139,690 61,114 139,690 61,114
a Dictaphone Corporation, Bank Claim
Revolver Commitment .................... -- -- 305,800 266,046 305,800 266,046
Tranche C Term Loan .................... -- -- 116,000 102,080 116,000 102,080
a Dow Corning Corp.:
Bank Debt #1 ........................... -- -- 100,000 128,250 100,000 128,250
9.375%, 2/20/99 ........................ -- -- 550,000 705,375 550,000 705,375
ac Golden Ocean Group Ltd.,
10.00%, 8/31/01 ........................ -- -- 1,050,000 115,500 1,050,000 115,500
Harnischfeger Industries Inc. ..........
8.90%, 3/01/22 ......................... -- -- 290,000 176,900 290,000 176,900
8.70%, 6/15/22 ......................... -- -- 145,000 88,450 145,000 88,450
6.875%, 2/15/27 ........................ -- -- 353,000 215,330 353,000 215,330
See accompanying notes to pro forma combining financial statements.
26
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS & NOTES IN REORGANIZATION (CONT.)
a Integrated Health Services Inc.,
Tranche B, Term Loan ................... -- -- 239,392 221,438 239,392 221,438
a Koninklijke Nederlandse
Vliegtuigenfabriek Fokker, Trade Claim . $ -- $ -- $ 550,118 EUR $453,846 $ 550,118 EUR $453,846
a Loewen Group Inc.:
Bank Claim, Revolver Commitment ........ -- -- 129,798 81,124 129,798 81,124
144A, 6.70%, 10/01/99 .................. -- -- 355,000 214,775 355,000 214,775
Series 3, 7.50%, 4/15/01 ............... -- -- 90,000 56,700 90,000 56,700
Series 7, 7.75%, 10/15/01 .............. -- -- 170,000 107,100 170,000 107,100
Series 5, 6.10%, 10/02/02 .............. -- -- 250,000 CAD 103,348 250,000 CAD 103,348
Series 4, 8.25%, 4/15/03 ............... -- -- 190,000 118,750 190,000 118,750
Series 6, 7.20%, 6/01/03 ............... -- -- 1,550,000 992,000 1,550,000 992,000
Series 2, 8.25%, 10/15/03 .............. -- -- 555,000 346,875 555,000 346,875
Series 7, 7.60%, 6/01/08 ............... -- -- 1,235,000 784,225 1,235,000 784,225
a Nippon Credit Bank Ltd., Bank Claim .... -- -- 44,574,201 JPY 58,842 44,574,201 JPY 58,842
a Nippon Total Finance, Bank Claim ....... -- -- 45,189,925 JPY 22,209 45,189,925 JPY 22,209
a Paging Network Inc., Revolver
Commitment, A .......................... -- -- 1,650,000 1,485,000 1,650,000 1,485,000
a Peregrine Investments Holdings Ltd.,
zero cpn., 2/28/99 ..................... -- -- 5,000,000 JPY 4,596 5,000,000 JPY 4,596
a Philip Services Corp. ..................
Bank Claim, Canadian Operating ......... -- -- 448,166 CAD 131,678 448,166 CAD 131,678
Bank Claim, Canadian Operating, fgn .... -- -- 9,144 3,932 9,144 3,932
Tranche 1 .............................. -- -- 319,116 137,220 319,116 137,220
Tranche 2 .............................. -- -- 296,498 127,494 296,498 127,494
Tranche 3 .............................. -- -- 148,249 63,747 148,249 63,747
a PIV Investment Finance (Cayman)
Ltd., 12/01/00 ......................... -- -- 12,060,000 3,316,500 12,060,000 3,316,500
a Pratama Datakom Asia BV
Reg S, 12.75%, 7/15/05 ................. -- -- 140,000 32,900 140,000 32,900
144A, 12.75%, 7/15/05 .................. -- -- 665,000 156,275 665,000 156,275
a Ritvik Holdings, Bank Claim:
Term Loan B ............................ -- -- 55,000 46,750 55,000 46,750
Term Loan C ............................ -- -- 137,000 116,450 137,000 116,450
a Tribasa Toll Road Trust I,
10.50%, 12/01/11 ....................... -- -- 165,589 86,106 165,589 86,106
a Vencor Operating Inc., 9.875%, 5/01/05 . -- -- 1,635,000 498,675 1,635,000 498,675
a Vencor Inc., Bank Claim:
Commitment Revolver .................... -- -- 78,150 66,428 78,150 66,428
Term Loan A ............................ -- -- 432,469 356,787 432,469 356,787
Term Loan B ............................ -- -- 57,755 48,658 57,755 48,658
a Ventas Inc., Bank Claim:
Commitment Revolver, Tranche B ......... -- -- 194,782 181,147 194,782 181,147
Tranche A .............................. -- -- 79,500 73,935 79,500 73,935
Tranche C .............................. -- -- 75,300 70,782 75,300 70,782
Tranche D .............................. -- -- 26,626 21,833 26,626 21,833
a United Companies Financial
Corp, revolver ......................... -- -- 1,883,700 1,054,872 1,883,700 1,054,872
------------- ----------- -----------
TOTAL BONDS & NOTES IN REORGANIZATION
(COST $12,780,047) ..................... -- 14,592,057 14,592,057
------------- ----------- -----------
SHORT TERM INVESTMENTS 11.2%
Fannie Mae, 4.69% to 5.140% with
maturities to 12/08/99 ................. -- -- 22,578,000 12,133,547 22,578,000 12,133,547
Federal Home Loan Bank, 4.72% to 5.10%
with maturities to 11/05/99 ............ -- -- 7,000,000 6,887,678 7,000,000 6,887,678
Federal Home Loan Mortgage Corp., 4.67%
to 5.10% with maturities to 3/08/00 .... -- -- 37,550,000 37,110,346 37,550,000 37,110,346
------------- ----------- -----------
TOTAL SHORT TERM INVESTMENTS
(COST $56,121,702) ..................... -- 56,131,571 56,131,571
------------- ----------- -----------
TOTAL INVESTMENTS
(COST $426,310,610) 95.6% .............. 3,162,548 475,778,153 478,940,701
NET EQUITY IN FORWARD CONTRACTS .6% .... -- 3,203,691 3,203,691
SECURITIES SOLD SHORT (.6%) ............ -- (3,295,800) (3,295,800)
OTHER ASSETS, LESS LIABILITIES 4.4% .... 504,512 21,643,295 22,147,807
------------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combining financial statements.
27
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
<TABLE>
<CAPTION>
VIP MUTUAL SHARES
TVP MUTUAL SHARES VIP MUTUAL SHARES SECURITIES FUND
INVESTMENTS FUND SECURITIES FUND PRO FORMA COMBINED
----------------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES SOLD SHORT
TOTAL NET ASSETS 100.0% .......... $3,667,060 $497,329,339 $500,996,399
---------- ------------ ------------
ISSUER COUNTRY COUNTRY
-------------- -------------
Allied Signal Inc. ............... -- -- United States 3,100 $ 195,300 United States 3,100 $ 195,300
BP Amoco PLC, ADR ................ -- -- United Kingdom 4,200 455,700 United States 4,200 455,700
a DST Systems Inc. ................. -- -- United States 6,300 396,112 United States 6,300 396,112
Intel Corp. ...................... -- -- United States 3,400 202,300 United States 3,400 202,300
Nortel Networks Corp. ............ -- -- Canada 18,300 1,575,538 Canada 18,300 1,575,538
Unum Corp. ....................... -- -- United States 8,600 470,850 United States 8,600 470,850
---------- ------------ ------------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $3,132,279) ............ -- $3,295,800 $3,295,800
========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
SECURITY COUNTRY SHARES 06/30/1999 GAIN/LOSS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BP Amoco PLC, cfd. 10.3574 ....... -- -- United Kingdom 13,600 $ 234,952 $ (21,921)
BP Amoco PLC, cfd. 10.9450 ....... -- -- United Kingdom 5,500 98,657 (3,771)
BP Amoco PLC, cfd. 11.2992 ....... -- -- United Kingdom 10,200 182,964 (1,299)
Vodafone Group PLC, cfd. 11.2893 . -- -- United Kingdom 30,000 590,145 (56,305)
Vodafone Group PLC, cfd 12.272 ... -- -- United Kingdom 20,000 393,430 (6,557)
------------ -----------------------
TOTAL CONTRACT FOR DIFFERENCES ... -- -- $1,500,148 $ (89,853)
=========== =======================
<CAPTION>
VIP MUTUAL SHARES
SECURITIES FUND
PRO FORMA COMBINED
----------------------------------
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
SECURITY COUNTRY SHARES 06/30/1999 GAIN/LOSS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BP Amoco PLC, cfd. 10.3574 ....... United Kingdom 13,600 $ 234,952 $ (21,921)
BP Amoco PLC, cfd. 10.9450 ....... United Kingdom 5,500 98,657 (3,771)
BP Amoco PLC, cfd. 11.2992 ....... United Kingdom 10,200 182,964 (1,299)
Vodafone Group PLC, cfd. 11.2893 . United Kingdom 30,000 590,145 (56,305)
Vodafone Group PLC, cfd 12.272 ... United Kingdom 20,000 393,430 (6,557)
-----------------------
TOTAL CONTRACT FOR DIFFERENCES ... $1,500,148 $ (89,853)
=======================
</TABLE>
Currency Abbreviations:
CAD - Canadian Dollar
EUR - European Unit
GBP - British Pound
JPY - Japanese Yen
*Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
c Restricted security.
See accompanying notes to pro forma combining financial statements.
28
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP
MUTUAL SHARES
TVP MUTUAL VIP MUTUAL SECURITIES FUND
SHARES INVESTMENTS SHARES SECURITIES PRO FORMA
FUND FUND COMBINED
------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ................................................................ $ 2,776,100 $423,534,510 $426,310,610
------------------------------------------------------
Value ............................................................... 3,162,548 475,778,153 478,940,701
Cash ............................................................... 581,040 12,358,049 12,939,089
Receivables:
Investment securities sold .......................................... 56,875 6,285,733 6,342,608
Capital shares sold ................................................. 2,037 56,716 58,753
Dividends and interest .............................................. 4,525 1,156,679 1,161,204
From affiliates .................................................... 15,840 -- 15,840
Unrealized gain on forward exchange contracts ...................... -- 3,417,587 3,417,587
Deposits with brokers for securities sold short .................... 7,772,566 7,772,566
------------------------------------------------------
Total assets ........................................................ 3,822,865 506,825,483 510,648,348
------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................................... 137,417 5,274,802 5,412,219
Capital shares redeemed ............................................. -- 270,516 270,516
Affiliates .......................................................... 433 299,331 299,764
Securities sold short, at value (proceeds $3,132,279) .............. -- 3,295,800 3,295,800
Due to broker, variation margin .................................... -- 77,867 77,867
Unrealized loss on forward exchange contracts ...................... -- 213,896 213,896
Other liabilities .................................................. 17,955 63,932 81,887
------------------------------------------------------
Total liabilities ................................................... 155,805 9,496,144 9,651,949
------------------------------------------------------
Net assets, at value ............................................... $ 3,667,060 $497,329,339 $500,996,399
======================================================
CLASS 1:
Net assets, at value ............................................... $ 2,456,111 $496,887,152 $499,343,263
======================================================
Shares outstanding** ............................................... 220,178 36,256,033 36,435,311
======================================================
Net asset value and offering price per share ....................... $ 11.16 $ 13.70 $ 13.70
======================================================
CLASS 2:
Net assets, at value ............................................... $ 1,210,949 $ 442,187 $ 1,653,136
======================================================
Shares outstanding** ............................................... 108,637 32,326 120,846
======================================================
Net asset value and offering price per share ....................... $ 11.15 $ 13.68 $ 13.68
======================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
29
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP MUTUAL
SHARES
TVP MUTUAL VIP MUTUAL SECURITIES FUND
SHARES INVESTMENTS SHARES SECURITIES PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ......................................... $ 17,296 $ 3,173,746 $ -- $ 3,191,042
Interest .......................................... 283 2,795,696 -- 2,795,979
--------------------------------------------------------------------------
Total investment income ............................ 17,579 5,969,442 -- 5,987,021
--------------------------------------------------------------------------
Expenses:
Management fees ................................... 7,319 1,430,056 -- 1,437,375
Administrative fees ............................... 1,181 336,639 466 a 338,286
Distribution fees - Class 2 ....................... 890 296 (51)b 1,135
Custodian fees .................................... 100 16,100 -- 16,200
Reports to shareholders ........................... 10,100 28,800 -- 38,900
Professional fees ................................. 11,422 18,500 -- 29,922
Trustees' fees and expenses ....................... -- 1,900 -- 1,900
Other ............................................. -- 29,294 -- 29,294
--------------------------------------------------------------------------
Total expenses ..................................... 31,012 1,861,585 415 1,893,012
Expenses waived/paid by affiliate .................. (17,938) -- 17,938 c --
--------------------------------------------------------------------------
Net expenses ....................................... 13,074 1,861,585 18,353 1,893,012
--------------------------------------------------------------------------
Net investment income ............................. 4,505 4,107,857 (18,353) 4,094,009
--------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................ 36,585 20,421,696 -- 20,458,281
Foreign currency transactions ...................... (3,290) 1,923,527 -- 1,920,237
--------------------------------------------------------------------------
Net realized gain .................................. 33,295 22,345,223 -- 22,378,518
Net unrealized appreciation on:
Investments ........................................ 339,010 35,521,440 -- 35,860,450
Translation of assets and liabilities
denominated in foreign currencies ................ 3,439 3,031,844 -- 3,035,283
--------------------------------------------------------------------------
Net unrealized gain ................................ 342,449 38,553,284 -- 38,895,733
--------------------------------------------------------------------------
Net realized and unrealized gain ................... 375,744 60,898,507 -- 61,274,251
--------------------------------------------------------------------------
Net increase in net assets resulting
from operations .................................. $ 380,249 $65,006,364 $ (18,353) $65,368,260
==========================================================================
</TABLE>
a Pro Forma adjustment for difference in Administrative fee schedule.
b Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
c Pro Forma adjustment to remove TVP Mutual Shares expense limitation
+ Net of foreign taxes of $157,586 and $896,270 for VIP Mutual Shares
Securities Fund and TVP Mutual Shares Investments Fund, respectively
See accompanying notes to pro forma combining financial statements.
30
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP MUTUAL
SHARES
TVP MUTUAL VIP MUTUAL SECURITIES FUND
SHARES INVESTMENTS SHARES SECURITIES PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ...................................... $ 6,174 $ 8,857,531 $ -- $ 8,863,705
Interest ....................................... 8,384 7,107,398 -- 7,115,782
----------------------------------------------------------------------------
Total investment income ................... 14,558 15,964,929 -- 15,979,487
----------------------------------------------------------------------------
Expenses:
Management fees ................................ 3,215 2,841,641 4,666 a 2,849,522
Administrative fees ............................ 531 669,378 1,234 b 671,143
Distribution fees - Class 2 .................... 103 -- (103)c --
Transfer agent fees ............................ -- -- -- --
Custodian fees ................................. 100 51,300 -- 51,400
Reports to shareholders ........................ 9,600 36,000 -- 45,600
Registration and filing fees ................... 150 -- -- 150
Professional fees .............................. 650 12,900 -- 13,550
Trustees' fees and expenses .................... 1,000 2,400 -- 3,400
Other .......................................... 272 13,311 -- 13,583
----------------------------------------------------------------------------
Total expenses ............................ 15,621 3,626,930 5,797 3,648,348
Expenses waived/paid by affiliate ......... (10,110) -- 10,110 d --
----------------------------------------------------------------------------
Net expenses ............................. 5,511 3,626,930 15,907 3,648,348
----------------------------------------------------------------------------
Net investment income ................... 9,047 12,337,999 15,907 12,331,139
----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................... (23,688) (9,941,502) -- (9,965,190)
Foreign currency transactions ................. 3,542 438,970 -- 442,512
----------------------------------------------------------------------------
Net realized loss ........................ (20,146) (9,502,532) -- (9,522,678)
Net unrealized appreciation (depreciation) on:
Investments .................................... 47,438 (8,452,402) -- (8,404,964)
Translation of assets and liabilities
denominated in foreign currencies ............. (3,439) (514,841) -- (518,280)
----------------------------------------------------------------------------
Net unrealized gain (loss) ............... 43,999 (8,967,243) -- (8,923,244)
----------------------------------------------------------------------------
Net realized and unrealized gain (loss) ......... 23,853 (18,469,775) -- (18,445,922)
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................... $ 32,900 $ (6,131,776) $ 15,907 $ (6,114,783)
============================================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule
b Pro Forma adjustment for difference in Administrative fee schedule
c Pro Forma adjustment to 12b-1 expense agreement dPro Forma adjustment to
remove TVP Mutual Shares expense waived/paid by affiliate.
+ Net of foreign taxes of $342,801 and $201 for VIP Mutual Shares Securities
Fund and TVP Mutual Shares Investments Fund, respectively.
See accompanying notes to pro forma combining financial statements.
31
<PAGE>
TVP MUTUAL SHARES INVESTMENTS FUND
VIP MUTUAL SHARES SECURITIES FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton Mutual Shares Fund ("TVP Templeton Mutual Shares"), the
Franklin Templeton Variable Insurance Products Trust Templeton Mutual Shares
Fund ("VIP Templeton Mutual Shares Fund") will acquire all the net assets of the
TVP Templeton Mutual Shares Class 1 and 2 in exchange for the Classes 1 and 2
shares, respectively, shares of VIP Templeton Mutual Shares Fund. The merger
will be accounted for by the method of accounting for tax free business
combinations of investment companies. The pro forma combining Statement of
Assets and Liabilities reflects the financial position of TVP Templeton Mutual
Shares June 30, 1999 as though the merger occurred as of that date. The pro
forma combining Statement of Operations reflects the results of operations of
the TVP Templeton Mutual Shares and VIP Templeton Mutual Shares for the period
January 1, 1999 to June 30, 1999 as though the merger occurred on January 1,
1999. The pro forma financial statements do not reflect the expenses of either
fund in carrying out its obligations under the Agreement and Plan of
Reorganization or any adjustment with respect to additional distributions that
may be made prior to reorganization. The pro forma financial statements are
presented for the information of the reader, and should be read in conjunction
with the historical financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton Mutual Shares at June 30, 1999 by the
Class 1 and 2 net asset value per share of the VIP Templeton Mutual Shares,
respectively at June 30, 1999.
32
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON GLOBAL INCOME
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
TVP TEMPLETON BOND FUND SECURITIES FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG TERM SECURITIES 98.8%
ARGENTINA 1.5%
Republic of Argentina, 10.95%, 11/01/99 .. $ 350,000 $ 353,500 $ 1,645,000 $ 1,661,450 $ 1,995,000 $ 2,014,950
------------ ------------ ------------
AUSTRALIA 5.2%
Australian Government, 10.00%,
10/15/07 ................................ 1,463,000 AUD 1,201,184 7,220,000 AUD 5,927,922 8,683,000 AUD 7,129,106
------------ ------------ ------------
BELGIUM 5.1%
Kingdom of Belgium, 6.25%, 3/28/07 ....... 838,376 EUR 958,984 5,291,039 EUR 6,052,203 6,129,415 EUR 7,011,187
------------ ------------ ------------
BRAZIL .9%
Republic of Brazil, FRN, 5.938%,
4/15/09 ................................. 170,000 117,300 1,510,000 1,041,900 1,680,000 1,159,200
------------ ------------ ------------
BULGARIA 1.8%
Republic of Bulgaria, Series A, FRN,
5.875%, 7/28/24 ......................... 605,000 413,669 2,970,000 2,030,738 3,575,000 2,444,407
------------ ------------ ------------
CANADA 1.5%
Government of Canada, 7.00%, 12/01/06 .... 475,000 CAD 353,970 2,345,000 CAD 1,747,494 2,820,000 CAD 2,101,464
------------ ------------ ------------
DENMARK 2.1%
Kingdom of Denmark, 7.00%, 11/15/07 ...... 3,001,000 DKK 481,257 14,838,000 DKK 2,379,506 17,839,000 DKK 2,860,763
------------ ------------ ------------
ECUADOR 1.4%
Republic of Ecuador, FRN, 6.00%,
2/28/25 ................................. 670,000 313,647 3,500,000 1,638,455 4,170,000 1,952,102
------------ ------------ ------------
GERMANY 12.8%
Federal Republic of Germany, 5.25%,
2/21/01 ................................. -- -- 9,129,117 EUR 9,723,728 9,129,117 EUR 9,723,728
Hypothekenbank In Essen AG,
Series 502, 5.25%, 1/22/08 .............. 935,664 995,970 5,279,089 EUR 5,619,341 6,214,753 EUR 6,615,311
Treuhandanstalt, 7.50%, 9/09/04 .......... 1,022,584 EUR 1,221,364 1,022,584 EUR 1,221,364
------------ ------------ ------------
2,217,334 15,343,069 17,560,40
------------ ------------ ------------
INDIA
Essar Steel Ltd., Reg S, FRN, 7.635%,
7/20/99 ................................. 50,000 33,750 -- 50,000 33,750
------------ ------------ ------------
ITALY 6.1%
Buoni Poliennali del Tesoro, 10.50%,
7/15/00 ................................. 612,000 EUR 677,953 2,272,406 EUR 2,517,293 2,884,406 EUR 3,195,246
Government of Italy, 7.75%, 11/01/06 ..... 877,975 EUR 1,086,763 3,305,318 EUR 4,091,341 4,183,293 EUR 5,178,104
------------ ------------ ------------
1,764,716 6,608,634 8,373,350
------------ ------------ ------------
MEXICO 7.9%
United Mexican States:
9.75%, 4/06/05 .......................... 650,000 660,563 6,000,000 6,097,500 6,650,000 6,758,063
9.875%, 1/15/07 ......................... -- -- 1,700,000 1,721,250 1,700,000 1,721,250
11.375%, 9/15/16 ........................ 175,000 188,213 175,000 188,213
6.25%, 12/31/19 ......................... 800,000 593,000 800,000 593,000
11.50%, 5/15/26 ......................... 250,000 279,375 1,230,000 1,374,525 1,480,000 1,653,900
------------ ------------ ------------
1,721,151 9,193,275 10,914,426
------------ ------------ ------------
NEW ZEALAND 2.4%
Government of New Zealand, 7.00%,
7/15/09 ................................. 990,000 NZD 543,312 5,050,000 NZD 2,771,439 6,040,000 NZD 3,314,751
------------ ------------ ------------
NORWAY .4%
Statkraft SF, 7.50%, 11/10/99 ............ 511,292 EUR 535,177 -- 511,292 EUR 535,177
------------ ------------ ------------
PANAMA .1%
Republic of Panama, 8.875%, 9/30/27 ...... 170,000 141,100 -- 170,000 141,100
------------ ------------ ------------
PERU .7%
Republic of Peru, FRN, 4.50%, 3/07/17 .... 235,000 144,967 1,300,000 801,944 1,535,000 946,911
------------ ------------ ------------
Sweden 3.1%
Kingdom of Sweden, 6.00%, 2/09/05 ........ 5,800,000 SEK 725,750 28,700,000 SEK 3,591,213 34,500,000 SEK 4,316,963
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
33
<PAGE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON GLOBAL INCOME
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
TVP TEMPLETON BOND FUND SECURITIES FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
TURKEY .5%
Republic of Turkey, 12.375%, 6/15/09 ..... $ 100,000 $ 99,250 $ 535,000 $ 530,988 $ 635,000 $ 630,238
------------ ------------ ------------
UNITED KINGDOM 10.2%
United Kingdom:
6.50%, 12/07/03 ......................... 820,000 GBP 1,375,628 5,400,000 GBP 9,059,015 6,220,000 GBP 10,434,643
7.50%, 12/07/06 ......................... 500,000 GBP 888,607 1,500,000 GBP 2,665,821 2,000,000 GBP 3,554,428
------------ ------------ ------------
2,264,235 11,724,836 13,989,071
------------ ------------ ------------
UNITED STATES 33.9%
Fannie Mae, 6.875%, 6/07/02 .............. 475,000 GBP 768,191 475,000 GBP 768,191
U.S. Treasury Notes:
4.50%, 1/31/01 .......................... 2,100,000 2,069,157 11,000,000 10,838,443 13,100,000 12,907,600
7.25%, 8/15/04 .......................... 1,072,000 1,139,000 5,519,000 5,863,938 6,591,000 7,002,938
6.125%, 11/15/27 ........................ 412,000 408,266 412,000 408,266
5.25%, 11/15/28 ......................... 4,395,000 3,890,950 24,500,000 21,690,167 28,895,000 25,581,117
------------ ------------ ------------
8,275,564 38,392,548 46,668,112
------------ ------------ ------------
VENEZUELA 1.2%
Republic of Venezuela, 144A, 9.125%,
6/18/07 ................................. 300,000 228,000 1,940,000 1,474,400 2,240,000 1,702,400
------------ ------------ ------------
TOTAL LONG TERM SECURITIES
(COST $144,447,861) ..................... 22,887,817 112,912,014 135,799,831
------------ ------------ ------------
SHORT TERM INVESTMENTS
(COST $509,000) .4%
Chase Securities Inc., 5.00%, 7/01/99,
Time Deposit ............................ 509,000 -- 509,000
------------ ------------ ------------
TOTAL INVESTMENTS
(COST $144,956,861) 99.1% ............... 23,396,817 112,912,014 136,308,831
NET EQUITY IN FORWARD CONTRACTS .......... 15,853 31,411 47,264
OTHER ASSETS, LESS LIABILITIES .8% ....... 400,446 747,904 1,148,350
------------ ------------ ------------
TOTAL NET ASSETS 100.0% .................. $ 23,813,116 $113,691,329 $137,504,445
============ ============ ============
</TABLE>
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Unit
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krone
*Securities traded in U.S. dollars unless otherwise indicated.
See accompanying notes to pro forma combining financial statements.
34
<PAGE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL INCOME
TVP TEMPLETON VIP TEMPLETON SECURITIES FUND
BOND GLOBAL INCOME PRO FORMA
FUND SECURITIES FUND COMBINED
--------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ........................................................... $ 24,840,681 $120,116,180 $144,956,861
--------------------------------------------------------
Value .......................................................... 23,396,817 112,912,014 136,308,831
Cash ............................................................ 602 -- 602
Receivables:
Capital shares sold ............................................ 430 113 543
Dividends and interest ......................................... 439,143 1,882,841 2,321,984
Unrealized gain on forward exchange contracts ................... 15,853 31,411 47,264
--------------------------------------------------------
Total assets ............................................... 23,852,845 114,826,379 138,679,224
--------------------------------------------------------
Liabilities:
Payables:
Capital shares redeemed ........................................ 11 171,188 171,199
Affiliates ..................................................... 11,601 54,811 66,412
Funds advanced by custodian ..................................... -- 853,913 853,913
Other liabilities ............................................... 28,117 55,138 83,255
--------------------------------------------------------
Total liabilities .......................................... 39,729 1,135,050 1,174,779
--------------------------------------------------------
Net assets, at value ...................................... $ 23,813,116 $113,691,329 $137,504,445
========================================================
CLASS 1:
Net assets, at value ............................................ $ 23,523,321 $113,608,897 $137,132,218
========================================================
Shares outstanding ** ........................................... 2,343,325 9,311,962 11,240,103
========================================================
Net asset value and offering price per share .................... $ 10.04 $ 12.20 $ 12.20
========================================================
CLASS 2:
Net assets, at value ............................................ $ 289,795 $ 82,432 $ 372,227
========================================================
Shares outstanding ** ........................................... 28,891 6,766 30,559
========================================================
Net asset value and offering price per share .................... $ 10.03 $ 12.18 $ 12.18
========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
35
<PAGE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL INCOME
TVP TEMPLETON VIP TEMPLETON SECURITIES FUND
BOND GLOBAL INCOME PRO FORMA PRO FORMA
FUND SECURITIES FUND ADJUSTMENTS COMBINED
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest .................................................. $ 877,644 $ 4,131,998 $ -- $ 5,009,642
------------------------------------------------------------------
Total investment income .............................. 877,644 4,131,998 -- 5,009,642
------------------------------------------------------------------
Expenses:
Management fees ........................................... 66,912 393,647 -- 460,559
Administrative fees ....................................... 12,962 -- (12,962)a --
Distribution fees-Class 2 ................................. 103 32 63 b 198
Custodian fees ............................................ 3,600 26,200 -- 29,800
Reports to shareholders ................................... 4,900 12,800 -- 17,700
Registration and filing fees .............................. 700 -- -- 700
Professional fees ......................................... 7,000 3,400 -- 10,400
Trustees' fees and expenses ............................... 400 -- -- 400
Other ..................................................... 194 556 -- 750
------------------------------------------------------------------
Total expenses ....................................... 96,371 437,035 (12,899) 520,507
------------------------------------------------------------------
Net investment income .............................. 781,273 3,694,963 12,899 4,489,135
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................. (278,372) (921,611) -- (1,199,983)
Foreign currency transactions ............................ 25,160 147,984 -- 173,144
------------------------------------------------------------------
Net realized loss ................................... (253,212) (773,627) -- (1,026,839)
Net unrealized depreciation on:
Investments .............................................. (1,979,559) (10,006,919) -- (11,986,478)
Translation of assets and liabilities denominated
in foreign currencies ................................. (18,666) (46,104) -- (64,770)
------------------------------------------------------------------
Net unrealized loss ................................. (1,998,225) (10,053,023) -- (12,051,248)
------------------------------------------------------------------
Net realized and unrealized loss ........................... (2,251,437) (10,826,650) -- (13,078,087)
------------------------------------------------------------------
Net decrease in net assets resulting from operations ....... $ (1,470,164) $ (7,131,687) $ 12,899 $ (8,588,952)
==================================================================
</TABLE>
a Pro Forma adjustment for difference in Administrative fee schedule.
b Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
See accompanying notes to pro forma combining financial statements.
36
<PAGE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL INCOME
TVP TEMPLETON VIP TEMPLETON SECURITIES FUND
BOND GLOBAL INCOME PRO FORMA PRO FORMA
FUND SECURITIES FUND ADJUSTMENTS COMBINED
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends ................................................. $ -- $ 243 $ -- $ 243
Interest .................................................. 2,301,159 12,503,384 -- 14,804,543
------------------------------------------------------------------
Total investment income .............................. 2,301,159 12,503,627 -- 14,804,786
------------------------------------------------------------------
Expenses:
Management fees ........................................... 152,272 959,858 -- 1,112,130
Administrative fees ....................................... 29,088 -- (29,088)a --
Distribution fees - Class 2 ............................... -- -- -- --
Transfer agent fees ....................................... -- -- -- --
Custodian fees ............................................ 10,000 57,636 -- 67,636
Reports to shareholders ................................... 11,600 24,000 -- 35,600
Registration and filing fees .............................. 1,900 -- -- 1,900
Professional fees ......................................... 17,300 8,900 -- 26,200
Trustees' fees and expenses ............................... -- 1,400 -- 1,400
Other ..................................................... 271 2,961 -- 3,232
------------------------------------------------------------------
Total expenses ....................................... 222,431 1,054,755 (29,088) 1,248,098
Expenses waived/paid by affiliate .................... -- -- -- --
------------------------------------------------------------------
Net expenses ........................................ 222,431 1,054,755 (29,088) 1,248,098
------------------------------------------------------------------
Net investment income (loss) ....................... 2,078,728 11,448,872 (29,088) 13,556,688
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................. (534,364) (3,425,137) -- (3,959,501)
Foreign currency transactions ............................ (470,084) (2,195,341) -- (2,665,425)
------------------------------------------------------------------
Net realized loss ................................... (1,004,448) (5,620,478) -- (6,624,926)
Net unrealized appreciation (depreciation) on:
Investments ............................................... 993,306 6,156,507 -- 7,149,813
Translation of assets and liabilities denominated
in foreign currencies ................................... 21,110 (736,758) -- (715,648)
------------------------------------------------------------------
Net unrealized loss ................................. 1,014,416 5,419,749 -- 6,434,165
------------------------------------------------------------------
Net realized and unrealized loss ........................... 9,968 (200,729) -- (190,761)
------------------------------------------------------------------
Net decrease in net assets resulting from operations ....... $ 2,088,696 $ 11,248,143 $ (29,088) $ 13,365,927
==================================================================
</TABLE>
a Pro Forma adjustment for difference in Administrative fee schedule.
See accompanying notes to pro forma combining financial statements.
37
<PAGE>
TVP TEMPLETON BOND FUND
VIP TEMPLETON GLOBAL INCOME SECURITIES FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton Bond Fund ("TVP Bond Fund"), the Franklin Templeton
Variable Insurance Products Trust Templeton Global Income Fund ("VIP Templeton
Global Income Fund") will acquire all the net assets of the TVP Templeton Bond
Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares
of VIP Templeton Global Income Fund. The merger will be accounted for by the
method of accounting for tax free business combinations of investment companies.
The pro forma combining Statement of Assets and Liabilities reflects the
financial position of TVP Templeton Bond Fund June 30, 1999 as though the merger
occurred as of that date. The pro forma combining Statement of Operations
reflects the results of operations of the TVP Templeton Bond and VIP Templeton
Global Income for the period January 1, 1999 to June 30, 1999 as though the
merger occurred on January 1, 1999. The pro forma financial statements do not
reflect the expenses of either fund in carrying out its obligations under the
Agreement and Plan of Reorganization or any adjustment with respect to
additional distributions that may be made prior to reorganization. The pro forma
financial statements are presented for the information of the reader, and should
be read in conjunction with the historical financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton Bond at June 30, 1999 by the Class 1 and 2
net asset value per share of the VIP Templeton Global Income, respectively at
June 30, 1999.
38
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG TERM SECURITIES 97.9%
ARGENTINA 4.3%
a Atanor Cia Nacional Para la
Industria Quimica SA, D ................... 82,061 $ 40,214 152,050 $ 74,512 234,111 $ 114,726
Banco de Galicia y Buenos Aires
SA de CV, B ............................... 76,205 390,971 59,765 306,625 135,970 697,596
a Banco Frances SA .......................... 36,000 234,032 -- -- 36,000 234,032
a Buenos Aires Embotelladora SA, B, ADR ..... 29,000 1,827 56,200 3,541 85,200 5,368
a Capex SA, A ............................... 25,000 145,765 48,735 284,153 73,735 429,918
Central Costanera SA, B ................... 35,860 103,287 -- -- 35,860 103,287
a Molinos Rio de la Plata SA, B ............. 60,018 100,840 923,413 1,551,489 983,431 1,652,329
Nobleza Piccardo Sdad Industrial
Comercial y Financial ..................... 52,451 173,106 -- -- 52,451 173,106
Perez Companc SA, B ....................... 509,070 2,927,445 295,695 1,700,416 804,765 4,627,861
Quilmes Industrial SA, ADR ................ 123,000 1,522,125 144,600 1,789,427 267,600 3,311,552
a Sociedad Comercial del Plata
Cadelplata Come ........................... 345,950 132,858 1,140,960 438,172 1,486,910 571,030
Telecom Argentina Stet-France
SA, ADR ................................... 118,200 3,161,850 34,200 914,850 152,400 4,076,700
Telefonica De Argentina SA, ADR ........... 110,730 3,474,154 34,610 1,085,889 145,340 4,560,043
Transportadora de Gas del Sur SA, ADR ..... 51,600 483,750 -- -- 51,600 483,750
Transportadora de Gas del Sur SA, B ....... 110,115 207,037 -- -- 110,115 207,037
------------ ------------ ------------
13,099,261 8,149,074 21,248,335
------------ ------------ ------------
AUSTRIA 1.2%
Austria Tabak AG .......................... 23,700 1,380,891 7,000 407,858 30,700 1,788,749
Bank Austria AG ........................... 20,800 1,093,947 19,810 1,041,879 40,610 2,135,826
OMV AG .................................... 17,200 1,534,112 5,300 472,720 22,500 2,006,832
------------ ------------ ------------
4,008,950 1,922,457 5,931,407
------------ ------------ ------------
BOTSWANA .0%
Sechaba Brewery Holding Ltd. .............. 159,200 183,886 -- -- 159,200 183,886
------------ ------------ ------------
BRAZIL 12.3%
Aracruz Celulose SA, ADR .................. 267,200 5,878,400 119,000 2,618,000 386,200 8,496,400
Banco Bradesco SA ......................... 132,856,544 530,668 59,329,083 236,978 192,185,627 767,646
Banco Bradesco SA, pfd .................... 65,233,889 335,010 40,276,150 206,839 105,510,039 541,849
Banco do Brasil SA ........................ 37,626,000 150,289 75,902,976 303,178 113,528,976 453,467
Brasmotor SA, pfd ......................... 1,306,000 104,256 3,246,000 259,124 4,552,000 363,380
Centrais Eletricas Brasileiras
SA (Electrobras) .......................... 14,941,000 284,753 45,251,000 862,416 60,192,000 1,147,169
Centrais Eletricas Brasileiras
SA (Electrobras), B, pfd .................. 170,946,000 3,482,324 183,925,000 3,746,718 354,871,000 7,229,042
Centrais Geradoras Do Sul Do Brasil
SA, B, pfd ................................ 161,900,000 131,183 209,667,000 169,887 371,567,000 301,070
Cia Cervejaria Brahma, pfd ................ 495,000 282,171 473,000 269,630 968,000 551,801
Cia Energetica de Minas Gerais
Cemig, Br., pfd ........................... 113,752,000 2,402,261 40,185,000 848,643 153,937,000 3,250,904
a Cia Mesbla SA, pfd ........................ -- -- 7,400,000 31,838 7,400,000 31,838
Cia Vale do Rio Doce, A, pfd .............. 156,750 3,112,639 50,900 1,010,739 207,650 4,123,378
Copene-Petroquimica do Nordeste
SA, A, pfd ................................ 1,097,000 172,140 2,864,700 449,525 3,961,700 621,665
Duratex SA, pfd ........................... 12,525,000 335,906 52,566,800 1,409,780 65,091,800 1,745,686
Embratel Participacoes SA, pfd ............ 62,558,000 878,132 15,877,000 222,867 78,435,000 1,100,999
Investimentos Itau SA ..................... 212,359 113,561 89,527 47,876 301,886 161,437
a Investimentos Itau SA, pfd ................ 5,218,000 2,798,813 2,200,200 1,180,136 7,418,200 3,978,949
a Mannesmann SA ............................. 2,692,000 199,231 2,048,500 151,607 4,740,500 350,838
a Mannesmann SA, pfd ........................ -- -- 307,200 23,226 307,200 23,226
Petroleo Brasileiro SA, pfd ............... 1,523,000 238,987 -- -- 1,523,000 238,987
Tele Celular Sul Participacoes SA, pfd .... 62,558,000 133,862 15,877,000 33,974 78,435,000 167,836
Tele Centro Oeste Celular Participacoes
SA, pfd ................................... 23,658,000 30,104 2,629,000 3,345 26,287,000 33,449
Tele Centro Sul Participacoes SA, pfd ..... 397,594,000 4,421,746 71,999,000 800,720 469,593,000 5,222,466
See accompanying notes to pro forma combining financial statements.
39
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VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
BRAZIL (CONT.)
Tele Leste Celular Participacoes SA, pfd .. 62,558,000 $ 37,481 15,877,000 $ 9,513 78,435,000 $ 46,994
Tele Nordeste Celular Participacoes
SA, pfd ................................... 62,558,000 86,385 15,877,000 21,924 78,435,000 108,309
Tele Norte Celular Participacoes SA, pfd .. 62,558,000 35,696 15,877,000 9,060 78,435,000 44,756
Tele Norte Leste Participacoes SA, pfd .... 243,998,000 4,483,158 55,911,000 1,027,295 299,909,000 5,510,453
Tele Sudeste Celular Participacoes
SA, pfd ................................... 499,230,000 2,862,914 109,402,000 627,383 608,632,000 3,490,297
Telemig Celular Participacoes SA, pfd ..... 62,558,000 79,603 15,877,000 20,203 78,435,000 99,806
Telesp Celular Participacoes SA, pfd ...... 62,558,000 663,954 15,877,000 168,509 78,435,000 832,463
Telesp Participacoes SA, ADR .............. 248,400 5,682,150 47,500 1,086,563 295,900 6,768,713
Telesp Participacoes SA, pfd .............. 62,558,000 1,481,402 15,877,000 375,975 78,435,000 1,857,377
Unibanco Uniao de Bancos
Brasileiros SA ............................ 7,111,000 324,611 15,439,000 704,776 22,550,000 1,029,387
------------ ------------ ------------
41,753,790 18,938,247 60,692,037
------------ ------------ ------------
CHILE 2.4%
Cia Cervecerias Unidas SA, ADR ............ 7,500 214,687 15,000 429,375 22,500 644,062
Cia de Telecomunicaciones de Chile
SA, ADR ................................... 161,414 3,994,997 105,300 2,606,175 266,714 6,601,172
Empresa Nacional de Electricidad
SA, ADR ................................... 99,615 1,207,832 103,142 1,250,597 202,757 2,458,429
Enersis SA, ADR ........................... 38,753 886,475 26,642 609,436 65,395 1,495,911
Madeco Manufacturera de Cobre
SA, ADR ................................... 5,600 56,700 -- -- 5,600 56,700
Quinenco SA, ADR .......................... 30,900 289,687 47,900 449,063 78,800 738,750
------------ ------------ ------------
6,650,378 5,344,646 11,995,024
------------ ------------ ------------
CHINA .8%
Beijing Datang Power Generation Co. .......
Ltd., H ................................... 5,000 1,611 -- -- 5,000 1,611
China Resources Enterprises Ltd. .......... 116,000 204,824 -- -- 116,000 204,824
a China Telecommunications Ltd. ............. 58,000 161,093 -- -- 58,000 161,093
China Vanke Co. Ltd., B ................... 2,857,867 1,919,033 2,857,867 1,919,033
Guangshen Railway Co. Ltd., H ............. 768,000 117,791 -- -- 768,000 117,791
Guangshen Railway Co. Ltd., H, ADR ........ 20,400 155,550 -- -- 20,400 155,550
a Shanghai Dazhong Taxi Shareholding
Co. Ltd., B ............................... -- -- 455,300 309,604 455,300 309,604
Shandong Huaneng Power Development
Co. Ltd., ADR ............................. 22,500 116,719 96,500 500,594 119,000 617,313
a Shanghai New Asia Group Co. Ltd., B ....... 34,502 9,316 -- -- 34,502 9,316
Shanghai Petrochemical Co. Ltd., H ........ 1,812,900 427,590 1,060,500 250,129 2,873,400 677,719
Yanzhou Coal Mining Company Ltd., H ....... 100,000 35,766 -- -- 100,000 35,766
------------ ------------ ------------
1,230,260 2,979,360 4,209,620
------------ ------------ ------------
COLOMBIA .3%
Barvaria SA ............................... -- -- 202,807 753,258 202,807 753,258
Cementos Agros SA ......................... -- -- 255,000 662,105 255,000 662,105
------------ ------------ ------------
457,807 1,415,363 457,807 1,415,363
------------ ------------ ------------
CZECH REPUBLIC 1.6%
a CEZ AS .................................... 1,079,250 2,221,246 1,408,880 2,899,671 2,488,130 5,120,917
a SPT Telecom AS ............................ 113,540 1,843,341 66,310 1,076,554 179,850 2,919,895
Tabak AS .................................. 260 61,926 -- -- 260 61,926
------------ ------------ ------------
4,126,513 3,976,225 8,102,738
------------ ------------ ------------
EGYPT .1%
Commercial International Bank Ltd. ........ 38,700 347,550 -- -- 38,700 347,550
Eastern Tobacco Co. ....................... 1,100 26,793 -- -- 1,100 26,793
------------ ------------ ------------
374,343 -- 374,343
------------ ------------ ------------
GHANA .1%
Ashanti Goldfields Co. Ltd., GDR .......... 25,159 174,541 21,164 146,825 46,323 321,366
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
40
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TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
HONG KONG 5.3%
CDL Hotel International Ltd. .............. 61,250 $ 25,656 -- -- 61,250 $ 25,656
Cheung Kong Holdings Ltd. ................. 145,000 1,289,495 276,000 $ 2,454,487 421,000 3,743,982
China Overseas Land & Investment Ltd. ..... 487,000 69,044 -- -- 487,000 69,044
Citic Pacific Ltd. ........................ 407,000 1,298,292 458,000 1,460,977 865,000 2,759,269
Cross Harbour Tunnel Co. Ltd. ............. 44,000 33,175 -- -- 44,000 33,175
Dairy Farm International Holdings Ltd. .... 1,334,370 1,601,244 237,772 285,326 1,572,142 1,886,570
Hang Lung Development Co. Ltd. ............ 972,000 1,202,652 980,000 1,212,551 1,952,000 2,415,203
Hong Kong & Shanghai Hotels Ltd. .......... 966,000 821,720 568,000 483,164 1,534,000 1,304,884
Hong Kong Electric Holdings Ltd. .......... 206,594 665,672 168,682 543,515 375,276 1,209,187
Hong Kong Land Holdings Ltd. .............. 19,000 30,780 5,000 8,100 24,000 38,880
HSBC Holdings PLC ......................... 46,902 1,710,726 41,078 1,498,299 87,980 3,209,025
Jardine Matheson Holdings Ltd. ............ 376,055 1,880,275 240,815 1,204,075 616,870 3,084,350
Jardine Strategic Holdings Ltd. ........... 35,000 91,000 -- -- 35,000 91,000
a Lai Sun Development Co. Ltd. .............. 48,000 4,207 -- -- 48,000 4,207
a Lai Sun Garment International Ltd. ........ 612,000 44,960 -- -- 612,000 44,960
New World Development Co. Ltd. ............ 786,322 2,356,275 827,632 2,480,064 1,613,954 4,836,339
Shangri La Asia Ltd. ...................... 2,000 2,475 -- -- 2,000 2,475
Sun Hung Kai Properties Ltd. .............. 47,617 434,201 54,739 499,144 102,356 933,345
Wheelock and Company Ltd. ................. 196,890 270,256 -- -- 196,890 270,256
------------ ------------ ------------
13,832,105 12,129,702 25,961,807
------------ ------------ ------------
HUNGARY 1.5%
Borsodchem RT ............................. 45,569 1,111,531 29,330 711,600 74,899 1,823,131
Borsodchem RT, GDR, Reg S ................. 6,900 169,567 -- -- 6,900 169,567
Egis RT ................................... 6,720 160,860 -- -- 6,720 160,860
a Fotex First Hungarian American Photo
Service Co. ............................... 45,385 17,262 -- -- 45,385 17,262
Gedeon Richter Ltd. ....................... 23,110 1,005,593 10,180 442,966 33,290 1,448,559
Matav RT .................................. 41,500 224,417 13,800 74,625 55,300 299,042
Mol Magyar Olay-Es Gazipari RT ............ 62,070 1,496,065 21,800 525,442 83,870 2,021,507
Pannonplast Plastic Industries PLC ........ 842 16,326 -- -- 842 16,326
Tiszai Vegyi Kombinat RT .................. 74,562 779,899 44,001 460,239 118,563 1,240,138
Zwack Unicum Ltd. ......................... 100 2,295 -- -- 100 2,295
------------ ------------ ------------
4,983,815 2,214,872 7,198,687
------------ ------------ ------------
INDIA .7%
Bajaj Auto Ltd. ........................... 650 8,110 25 312 675 8,422
a Bank of Baroda ............................ 100 151 100 151 --
Bharat Petroleum Corp. Ltd. ............... 12,900 78,243 -- -- 12,900 78,243
a Hindalco Industries Inc. .................. 19,742 286,151 -- -- 19,742 286,151
Hindustan Petroleum Corporation Ltd. ...... 64,338 368,716 35,600 204,021 99,938 572,737
Indian Aluminium Co Ltd ................... 29,000 40,964 45,000 63,565 74,000 104,529
Indian Petrochemicals Corp. Ltd. .......... -- -- 100 237 100 237
Larsen and Toubro Ltd. .................... 91,671 605,696 120,924 798,978 212,595 1,404,674
Mahanagar Telephone Nigam Ltd. ............ 96,800 415,228 96,800 415,228
* National Aluminum Co Ltd., 14.50%,
3/08/05 ................................... 1,529,000 INR 37,249 3,085,500 INR 75,167 4,614,500 INR 112,416
Reliance Industries Ltd. .................. 8,515 34,699 87,500 356,568 96,015 391,267
Tata Iron & Steel Co. Ltd. ................ -- -- 100 323 100 323
------------ ------------ ------------
1,875,056 1,499,322 5,227,465 3,374,378
------------ ------------ ------------
INDONESIA 5.5%
a Asia Pulp & Paper Co. Ltd., ADR ........... 92,800 893,200 82,900 797,913 175,700 1,691,113
a Asia Pulp & Paper Co. Ltd., ADR, wts ...... 20,540 53,917 18,340 48,143 38,880 102,060
a PT Barito Pacific Timber TBK .............. 1,774,000 193,246 -- -- 1,774,000 193,246
PT Gudang Garamm .......................... 320,000 869,136 226,000 613,827 546,000 1,482,963
a PT Indah Kiat Pulp & Paper Corp. .......... 3,750,750 1,743,268 3,938,000 1,830,298 7,688,750 3,573,566
a PT Indocement Tunggal PrakarSA ............ 1,746,000 893,922 1,408,500 721,127 3,154,500 1,615,049
a PT Indofoods Sukses Makmurr ............... 1,054,685 1,439,948 594,020 811,008 1,648,705 2,250,956
PT Indosat ................................ 232,000 444,793 197,000 377,691 429,000 822,484
a PT Semen Cibinong ......................... 35,534,500 4,903,090 -- -- 35,534,500 4,903,090
PT Semen Gresik (Persero) ................. 316,501 689,545 338,617 737,728 655,118 1,427,273
See accompanying notes to pro forma combining financial statements.
41
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VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
INDONESIA (CONT.)
a PT Sinar Mas Agro Resources &
Technology Corp. .......................... 482,800 $ 431,259 -- $ -- 482,800 $ 431,259
PT Tambang TimaH .......................... 1,289,500 1,123,747 1,002,000 873,203 2,291,500 1,996,950
PT Telekomunikasi Indonesia
(Persero), B .............................. 5,611,140 3,259,922 3,348,260 1,945,249 8,959,400 5,205,171
PT Tempo Scan Pacific ..................... 487,000 203,359 -- -- 487,000 203,359
a PT Tjiwi Kimia ............................ 909,454 350,044 1,520,926 585,396 2,430,380 935,440
------------ ------------ ------------
17,492,396 12,674,563 9,341,583 66,296,233 26,833,979
------------ ------------ ------------
ISRAEL .3%
a Formula Systems Ltd. ...................... 18,380 557,917 9,780 296,868 28,160 854,785
Koor Industries Ltd. ...................... 2,590 298,623 2,686 309,692 5,276 608,315
------------ ------------ ------------
856,540 606,560 1,463,100
------------ ------------ ------------
JORDAN .1%
a Zara Investment Holdings Company Ltd. ..... 345,450 752,561 -- -- 345,450 752,561
------------ ------------ ------------
MALAYSIA 3.8%
Boustead Holdings Bhd ..................... 403,000 366,942 384,000 349,642 787,000 716,584
Federal Flour Mills Bhd ................... 33,000 31,263 99,000 93,789 132,000 125,052
Genting Bhd ............................... 306,600 1,169,921 326,400 1,245,474 633,000 2,415,395
Golden Hope Plantations Bhd ............... 122,000 104,663 37,000 31,742 159,000 136,405
Hong Leong Industries Bhd ................. 206,800 243,806 336,200 396,362 543,000 640,168
Island & Peninsula Bhd .................... 443,000 433,674 454,000 444,442 897,000 878,116
Kian Joo Can Factory Bhd .................. 59,000 107,132 59,000 107,132 118,000 214,264
a Leader Universal Holdings Bhd ............. 1,452,000 607,547 982,000 410,889 2,434,000 1,018,436
Malayawata Steel Bhd ...................... 563,000 225,200 -- -- 563,000 225,200
Malaysian Airlines System Bhd ............. 246,000 336,632 197,000 269,579 443,000 606,211
Malaysian International Shipping
Corp., fgn ................................ 76,000 139,000 207,666 379,810 283,666 518,810
Oriental Holdings Bhd ..................... 61,000 166,947 45,000 123,158 106,000 290,105
Perlis Plantations Bhd .................... 175,000 204,474 374,500 437,574 549,500 642,048
Perusahaan Otomobil Nasional Bhd .......... 141,000 326,526 214,000 495,579 355,000 822,105
Public Bank Bhd ........................... 1,740,400 1,323,620 149,000 113,318 1,889,400 1,436,938
Public Bank Bhd., fgn ..................... 2,219,000 2,324,110 20,000 20,947 2,239,000 2,345,057
Resorts World Bhd ......................... 679,000 1,599,224 789,000 1,858,303 1,468,000 3,457,527
Shangri La Hotels (Malaysia) Bhd .......... 31,000 11,339 886,000 324,089 917,000 335,428
Tanjong PLC ............................... 312,000 775,895 214,000 532,184 526,000 1,308,079
Technology Resources Industries Bhd ....... 437,000 356,500 104,000 84,842 541,000 441,342
YTL Corp. Bhd ............................. 176,000 370,526 -- -- 176,000 370,526
------------ ------------ ------------
11,224,941 7,718,855 18,943,796
------------ ------------ ------------
MEXICO 10.7%
Cemex SA .................................. 616,990 3,060,244 54,810 271,855 671,800 3,332,099
Cemex SA, B ............................... 1,322,500 6,594,848 1,454,500 7,253,086 2,777,000 13,847,934
a Cifra SA de CV, V ......................... 710,833 1,426,979 209,000 419,562 919,833 1,846,541
a Coca Cola Femsa SA de CV, L, ADR .......... 52,300 1,013,312 45,000 871,875 97,300 1,885,187
DESC SA de CV DESC, B ..................... 1,250,000 1,374,800 460,170 506,113 1,710,170 1,880,913
Fomento Economico Mexicano SA
de CV FemSA ............................... 31,000 1,236,125 5,000 199,375 36,000 1,435,500
a Grupo Financiero Banamex Accival SA
de CV ..................................... 1,895,068 4,856,554 1,250,885 3,205,685 3,145,953 8,062,239
Grupo Industrial Maseca SA de CV, B ....... 19,000 11,361 -- -- 19,000 11,361
Panamerican Beverages Inc., A ............. 59,800 1,423,988 2,900 69,056 62,700 1,493,044
Telefonos de Mexico SA (Telmex), ADR ...... 66,500 5,374,031 144,800 11,701,650 211,300 17,075,681
Vitro SA De CV, A ......................... 353,500 609,990 718,349 1,239,564 1,071,849 1,849,554
------------ ------------ ------------
26,982,232 25,737,821 52,720,053
------------ ------------ ------------
NEW ZEALAND
Brierley Investments Ltd. ................. 713,000 200,244 -- 713,000 200,244
------------ ------------ ------------
PAKISTAN .3%
a Bank of Punjab ............................ 35,204 9,040 -- 35,204 9,040
a DG Khan Cement Co. ........................ 1,034,288 83,184 -- 1,034,288 83,184
See accompanying notes to pro forma combining financial statements.
42
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VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
PAKISTAN (CONT.)
Engro Chemical Pakistan Ltd. .............. 138,534 $ 194,646 -- $ -- 138,534 $ 194,646
Pakistan Telecommunications Corp., A ...... 906,000 348,529 2,222,000 854,781 3,128,000 1,203,310
------------ ------------ ------------
635,399 854,781 1,490,180
------------ ------------ ------------
PERU .8%
Telefonica Del Peru SA, ADR ............... 154,200 2,332,275 109,500 1,656,188 263,700 3,988,463
------------ ------------ ------------
PHILIPPINES 2.9%
a A Soriano Corp. ........................... 6,301,500 182,172 -- -- 6,301,500 182,172
Ayala Corp. ............................... 441,840 145,151 -- -- 441,840 145,151
a Belle Corp. ............................... 39,075,000 4,159,100 -- -- 39,075,000 4,159,100
a Filinvest Development Corp. ............... 2,639,000 242,746 -- -- 2,639,000 242,746
a Keppel Philippine Holdings Inc., B ........ 8,776,186 174,140 -- -- 8,776,186 174,140
Petron Corp. .............................. 1,144,000 121,766 3,695,000 393,292 4,839,000 515,058
a Philex Mining Corp., B .................... 6,059,500 60,515 -- -- 6,059,500 60,515
Philippine Commercial International
Bank Inc. ................................. 185,060 1,264,536 -- -- 185,060 1,264,536
Philippine Long Distance Telephone
Co., ADR .................................. 45,800 1,379,725 71,700 2,159,963 117,500 3,539,688
a Philippine National Bank .................. 701,931 1,900,102 -- -- 701,931 1,900,102
RFM Corp. ................................. 1,587,636 202,366 -- -- 1,587,636 202,366
San Miguel Corp., B ....................... 703,200 1,533,919 132,700 289,464 835,900 1,823,383
a Southeast Asia Cement Holdings Inc. ....... 16,230,683 234,609 1,772,577 25,622 18,003,260 260,231
------------ ------------ ------------
11,600,847 2,868,341 14,469,188
------------ ------------ ------------
POLAND .8%
Bank Slaski SA W KatowicacH ............... 19,900 973,824 700 34,255 20,600 1,008,079
Elektrim SA ............................... 84,700 1,198,127 -- -- 84,700 1,198,127
a Impexmetal SA ............................. 93,892 430,752 -- -- 93,892 430,752
a Prokom Software SA ........................ 491 16,331 -- -- 491 16,331
a Rolimpex SA ............................... 22,617 34,299 -- -- 22,617 34,299
Telekomunikacja Polska SA ................. -- -- 40,416 283,278 40,416 283,278
Warta SA .................................. 14,709 288,669 28,395 557,261 43,104 845,930
Wielkopolski Bank Kredytowy SA ............ 12,100 70,932 12,100 70,932
------------ ------------ ------------
3,012,934 874,794 3,887,728
------------ ------------ ------------
RUSSIA 1.1%
a Aeroflot-Russia International Airlines .... 1,684,800 225,763 -- -- 1,684,800 225,763
GAZ Auto Works ............................ 1,270 44,755 1,310 46,164 2,580 90,919
Irkutskenergo ............................. 680,800 69,305 439,500 44,741 1,120,300 114,046
Irkutskenergo, ADR ........................ 7,000 35,630 7,000 35,630 14,000 71,260
a Krasnoyarsk Aluminum Plant ................ 5,748 35,375 -- -- 5,748 35,375
Lukoil Holdings, ADR ...................... 19,320 765,072 3,360 133,056 22,680 898,128
Mosenergo ................................. 5,937,200 265,987 2,052,000 91,930 7,989,200 357,917
Mosenergo, ADR ............................ 38,930 175,185 3,000 13,500 41,930 188,685
a Norilsk Nickel ............................ 41,700 136,776 -- -- 41,700 136,776
a Novorosissk Sea Shipping .................. 28,000 4,715 -- -- 28,000 4,715
a Novorosissk Sea Shipping., pfd ............ 224,000 13,418 -- -- 224,000 13,418
a Red October ............................... 3,000 20,700 -- -- 3,000 20,700
a Rostelecom ................................ 553,000 873,740 2,000 3,160 555,000 876,900
a Rostelecom, ADR ........................... 33,300 326,756 11,900 116,769 45,200 443,525
a Rostelecom, pfd ........................... 257,300 132,509 -- -- 257,300 132,509
a Saint Petersburg City Telephone
Network, A, pfd ........................... 53,000 7,420 -- -- 53,000 7,420
a Tsum Trade House .......................... 317,500 64,833 -- -- 317,500 64,833
Unified Energy Systems .................... 3,400,000 297,500 610,600 53,428 4,010,600 350,928
Unified Energy Systems, ADR ............... 11,000 97,075 12,000 105,900 23,000 202,975
Unified Energy Systems, pfd ............... 200,000 8,160 -- -- 200,000 8,160
a Vimpel Communications, ADR ................ 45,400 1,052,712 10,950 253,903 56,350 1,306,615
------------ ------------ ------------
4,653,386 898,181 5,551,567
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
43
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
SINGAPORE 8.5%
Acer Computer International Ltd. .......... 195,000 $ 232,050 -- $ -- 195,000 $ 232,050
Acma Ltd. ................................. 193,000 194,984 -- -- 193,000 194,984
City Developments Ltd. .................... 277,000 1,773,451 367,500 2,352,863 644,500 4,126,314
Cycle & Carriage Ltd. ..................... 177,000 1,018,855 45,000 259,031 222,000 1,277,886
Delgro Corp. .............................. 39,500 95,125 -- -- 39,500 95,125
Development Bank of Singapore Ltd., fgn ... 5,000 61,087 -- -- 5,000 61,087
First Capital Corp. Ltd. .................. 408,000 635,066 262,000 407,812 670,000 1,042,878
Fraser and Neave Ltd. ..................... 466,000 2,066,549 445,000 1,973,421 911,000 4,039,970
Hai Sun Hup Group Ltd. .................... 714,000 423,577 1,315,000 780,117 2,029,000 1,203,694
Hong Leong Finance Ltd., fgn .............. 172,000 394,009 -- -- 172,000 394,009
Inchcape Motors Ltd. ...................... 143,000 230,144 163,000 262,332 306,000 492,476
Isetan (Singapore) Ltd. ................... 18,000 30,132 -- -- 18,000 30,132
Jurong Shipyard Ltd. ...................... 194,000 951,483 224,000 1,098,620 418,000 2,050,103
Keppel Corp., Ltd. ........................ 969,000 3,301,145 725,000 2,469,897 1,694,000 5,771,042
MCL Land Ltd. ............................. 605,000 764,023 -- -- 605,000 764,023
Metro Holdings Ltd. ....................... 39,000 61,392 -- -- 39,000 61,392
Natsteel Ltd. ............................. 1,323,000 2,315,736 1,008,000 1,764,370 2,331,000 4,080,106
a Neptune Orient Lines Ltd. ................. 300,000 366,520 -- -- 300,000 366,520
a Osprey Maritime Ltd. ...................... 267,000 183,489 -- -- 267,000 183,489
Overseas Chinese Banking Corp. Ltd., fgn .. 229,000 1,910,015 198,000 1,651,454 427,000 3,561,469
Overseas Union Enterprise Ltd. ............ 106,400 337,480 173,400 549,991 279,800 887,471
Sembcorp Industries Ltd. .................. 1,416,925 2,247,106 1,119,769 1,775,845 2,536,694 4,022,951
Singapore Petroleum Company, fgn .......... 110,000 90,455 -- -- 110,000 90,455
United Industrial Corporation Ltd. ........ 1,691,000 1,142,232 1,371,000 926,079 3,062,000 2,068,311
United Overseas Bank Ltd., fgn ............ 391,000 2,732,981 284,000 1,985,081 675,000 4,718,062
United Overseas Land Ltd. ................. 109,000 122,925 -- -- 109,000 122,925
WBL Corp. Ltd. ............................ 87,000 119,577 -- -- 87,000 119,577
------------ ------------ ------------
23,801,588 18,256,913 42,058,501
------------ ------------ ------------
SLOVAK REPUBLIC .2%
Nafta Gbely AS ............................ 6,695 88,399 4,800 63,378 11,495 151,777
a Slovnaft AS ............................... 11,000 145,241 28,010 369,836 39,010 515,077
a Vychodoslovenske Zeleziarne AS ............ 22,857 93,661 8,400 34,421 31,257 128,082
------------ ------------ ------------
327,301 467,635 794,936
------------ ------------ ------------
SOUTH AFRICA 10.1%
AECI Ltd. ................................. 63,600 142,282 63,600 142,282
Anglo American PLC ........................ 100,878 4,714,160 68,395 3,196,187 169,273 7,910,347
Barlow Ltd. ............................... 228,500 1,317,723 205,300 1,183,932 433,800 2,501,655
CG Smith Ltd. ............................. 513,000 1,474,944 618,600 1,778,558 1,131,600 3,253,502
De Beers/Centenary Linked Units ........... 118,100 2,829,938 66,740 1,599,238 184,840 4,429,176
a Del Monte Royal Foods Ltd. ................ 1,411,300 877,020 -- -- 1,411,300 877,020
Dunlop Africa Ltd. ........................ 191,200 99,806 -- -- 191,200 99,806
Edgars Consolidated Stores Ltd. ........... 16,563 128,727 -- -- 16,563 128,727
Firstrand Ltd. ............................ 710,000 811,832 79,000 90,331 789,000 902,163
Iscor Ltd. ................................ 2,859,390 895,558 3,395,912 1,063,597 6,255,302 1,959,155
Kersaf Investments Ltd. ................... 391,367 1,751,083 2,000 8,949 393,367 1,760,032
a Liberty International PLC ................. 79,444 525,938 27,075 179,241 106,519 705,179
Liberty Life Association of Africa Ltd. ... 198,392 2,541,338 62,070 795,097 260,462 3,336,435
Palabora Mining Co. Ltd. .................. 29,500 210,208 114,000 812,329 143,500 1,022,537
Rembrandt Group Ltd. ...................... 185,100 1,542,883 156,170 1,301,740 341,270 2,844,623
Sappi Ltd. ................................ 401,073 2,937,679 311,651 2,282,703 712,724 5,220,382
Sasol Ltd. ................................ 372,000 2,653,840 378,900 2,703,065 750,900 5,356,905
South African Breweries PLC ............... 397,580 3,452,348 251,244 2,181,653 648,824 5,634,001
Tongaat-Hulett Group Ltd. ................. 132,952 812,980 96,043 587,288 228,995 1,400,268
------------ ------------ ------------
29,720,287 19,763,908 49,484,195
------------ ------------ ------------
SOUTH KOREA 8.7%
Asia Cement Manufacturing Co. Ltd. ........ 61,820 1,522,134 -- -- 61,820 1,522,134
a Cho Hung Bank Co. Ltd. .................... 34,188 191,689 -- -- 34,188 191,689
a Cho Hung Bank Co. Ltd., GDR, Reg S ........ 20,868 116,965 -- -- 20,868 116,965
a Daegu Bank Co. Ltd. ....................... 143,655 640,397 -- -- 143,655 640,397
See accompanying notes to pro forma combining financial statements.
44
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
SOUTH KOREA (CONT.)
a Daewoo Electronics Co. .................... 62,560 $ 308,071 -- $ -- 62,560 $ 308,071
Dongkuk Steel Mill Co. Ltd. ............... 14,592 85,724 -- -- 14,592 85,724
Hana Bank ................................. 585,442 8,598,284 27,132 398,483 612,574 8,996,767
Hana Bank, GDR, Reg S ..................... 98,502 1,418,429 94,732 1,364,141 193,234 2,782,570
a Hotel Shilla Co. .......................... 109,330 1,218,451 -- -- 109,330 1,218,451
Korea Electric Power Corp. ................ 200,970 8,351,324 83,100 3,453,227 284,070 11,804,551
a Kyongnam Bank ............................. 520,745 1,979,506 -- -- 520,745 1,979,506
LG Electronics Inc. ....................... 71,376 1,973,246 13,900 384,276 85,276 2,357,522
Pohang Iron & Steel Co. Ltd., ADR ......... -- -- 15,500 521,188 15,500 521,188
Saehan Precision Co. Ltd. ................. 58,905 1,201,000 -- -- 58,905 1,201,000
Samsung Display Devices Ltd. .............. 22,337 1,215,750 27,586 1,501,441 49,923 2,717,191
Samsung Electronics Co. Ltd. .............. 28,595 3,137,421 19,481 2,137,440 48,076 5,274,861
a Samsung Heavy Industries Co. Ltd. ......... 191,755 1,043,677 190,082 1,034,572 381,837 2,078,249
Shin Poong Paper Manufacturing
Co Ltd. ................................... 5,361 53,263 -- -- 5,361 53,263
Shin Young Wocoal Inc. .................... 1,288 75,667 -- -- 1,288 75,667
SK Corp. .................................. -- -- 1,410 40,564 1,410 40,564
Ssangyong Oil Refining Co. Ltd. ........... 3,570 92,527 -- -- 3,570 92,527
Tong Yang Merchant Bank ................... 55,502 343,802 118 731 55,620 344,533
------------ ------------ ------------
33,567,327 10,836,063 44,403,390
------------ ------------ ------------
THAILAND 8.0%
Advanced Info Service Public Co. ..........
Ltd., fgn ................................. 72,900 988,475 100,300 1,360,000 173,200 2,348,475
American Standard Sanitaryware Public
Co. Ltd., fgn ............................. -- -- 30,800 154,522 30,800 154,522
Ayudhya Insurance Public Co. Ltd., fgn .... 3,800 12,263 3,800 12,263
a Bangkok Bank Public Co. Ltd. .............. 1,249,687 2,728,130 922,400 2,013,646 2,172,087 4,741,776
a Bangkok Bank Public Co. Ltd., fgn ......... 123,000 460,312 23,000 86,075 146,000 546,387
a Bangkok Insurance Public Co. Ltd. ......... 25,600 96,499 -- -- 25,600 96,499
BEC World Public Co Ltd., fgn ............. 23,000 143,458 -- -- 23,000 143,458
a Charoen Pokphand Feedmill Public
Co. Ltd., fgn ............................. 547,800 891,336 511,500 832,271 1,059,300 1,723,607
a Hana Microelectronics Co. Ltd., fgn ....... 86,200 259,477 160,400 482,831 246,600 742,308
Hua Thai Manufacturing Public Co. .........
Ltd., fgn ................................. -- -- 8,000 11,260 8,000 11,260
Industrial Finance Corp. of Thailand, fgn . 1,041,500 663,736 1,078,700 687,443 2,120,200 1,351,179
Italian-Thai Development Public Co. .......
Ltd., fgn ................................. 66,900 161,467 -- -- 66,900 161,467
a Jasmine International Public Co. Ltd., fgn 678,000 473,451 -- -- 678,000 473,451
a Land and House Public Co. Ltd. ............ 484,978 677,325 -- -- 484,978 677,325
a Land and House Public Co. Ltd., fgn ....... 206,278 374,797 5,800 10,538 212,078 385,335
Saha Pathanapibul Public Co. Ltd., fgn .... 430,500 642,102 -- -- 430,500 642,102
a Saha Union Public Co. Ltd. ................ 259,306 114,270 -- -- 259,306 114,270
Saha Union Public Co. Ltd., fgn ........... 277,994 124,391 -- -- 277,994 124,391
a Serm Suk Public Co. Ltd. .................. 31,100 144,220 -- -- 31,100 144,220
Serm Suk Public Co. Ltd., fgn ............. 4,900 25,912 -- -- 4,900 25,912
a Shin Corporations Public Company
Ltd., fgn ................................. 13,200 61,570 -- -- 13,200 61,570
a Siam Cement Public Co. Ltd. ............... 22,750 426,929 68,100 1,277,972 90,850 1,704,901
Siam Cement Public Co. Ltd., fgn .......... 84,950 2,580,176 -- -- 84,950 2,580,176
a Siam Commercial Bank, fgn ................. 361,901 500,527 -- -- 361,901 500,527
a Siam Commercial Bank, 144A, 5.25%,
cvt. pfd., fgn ............................ 547,000 778,780 40,000 56,949 587,000 835,729
Siam Makro Public Company Ltd., fgn ....... 307,900 586,158 376,000 715,802 683,900 1,301,960
a Telecomasia Corp. Public Co. Ltd., fgn .... 219,000 221,227 54,000 54,549 273,000 275,776
a Thai Airways International Public Co. .....
Ltd., fgn ................................. 414,000 812,843 408,700 802,437 822,700 1,615,280
a Thai Farmers Bank Public Co. Ltd. ......... 1,319,008 2,646,958 1,984,200 3,981,852 3,303,208 6,628,810
a Thai Farmers Bank Public Co. Ltd., fgn .... 775,025 2,396,009 569,800 1,761,551 1,344,825 4,157,560
a Thai Petrochemical Industry Public Co. ....
Ltd., fgn ................................. 795,120 517,502 -- -- 795,120 517,502
See accompanying notes to pro forma combining financial statements.
45
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON DEVELOPING
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM SECURITIES (CONT.)
THAILAND (CONT.)
a Thai Telephone & Telecommunication
Public Co. Ltd.,fgn ....................... 866,500 $ 328,976 -- $ -- 866,500 $ 328,976
Thai Wacoal Public Co. Ltd., fgn .......... 30,100 61,220 -- -- 30,100 61,220
a Tipco Asphalt Public Co. Ltd., fgn ........ 81,400 112,580 -- -- 81,400 112,580
a Total Access Communication Public
Co. Ltd. .................................. 607,200 1,943,040 419,800 1,343,360 1,027,000 3,286,400
a United Communications Industries, fgn ..... 284,500 323,269 471,700 535,979 756,200 859,248
------------ ------------ ------------
23,279,385 16,169,037 39,448,422
------------ ------------ ------------
TURKEY 2.4%
Akbank .................................... 138,078,552 2,028,547 332,362,112 4,882,815 470,440,664 6,911,362
Akcansa Cimento Sanayi Ve Ticaret AS ...... 38,200,000 389,223 -- -- 38,200,000 389,223
Anadolu Anonim Turk Sigorta Sirketi, Br ... 28,898,000 126,680 28,898,000 126,680
a Arcelik AS, Br ............................ 11,012,000 391,404 14,110,456 501,533 25,122,456 892,937
a Erciyas Biracilik ......................... 11,706,000 269,059 8,638,000 198,542 20,344,000 467,601
a Eregli Demir ve Celik Fabrikalari AS ...... 18,168,000 253,996 57,961,000 810,317 76,129,000 1,064,313
Haci Omer Sabanci Holding AS,
ADR, 144A ................................. 23,500 128,075 150,100 818,045 173,600 946,120
Hurriyet Gazete ........................... 23,577,900 167,608 -- -- 23,577,900 167,608
Koc Holding AS ............................ 5,147,000 323,197 -- -- 5,147,000 323,197
a Tofas Turk Otomobil Fabrikasi AS .......... 6,225,500 24,709 17,732,561 70,380 23,958,061 95,089
a Tofas Turk Otomobil Fabrikasi AS, new ..... 9,337,875 37,062 -- -- 9,337,875 37,062
a Tofas Turk Otomobil Fabrikasi AS, rts ..... 12,450,500 34,518 14,186,035 39,329 26,636,535 73,847
a Turkiye Garanti Bankasi AS ................ 26,780,454 199,892 40,231,380 300,291 67,011,834 500,183
Turkiye Is Bankasi AS, C .................. 1,763,200 31,335 -- -- 1,763,200 31,335
------------ ------------ ------------
4,278,625 7,747,932 12,026,557
------------ ------------ ------------
VENEZUELA 3.3%
Compania Anonima Nacional Telefonos
de Venezuela, ADR ......................... 150,900 4,112,025 54,700 1,490,575 205,600 5,602,600
Electricidad De Caracas Saica Saca, ADR ... 198,071 3,876,544 95,528 1,869,626 293,599 5,746,170
Mavesa SA, ADR ............................ 95,700 311,025 306,300 995,475 402,000 1,306,500
------------ ------------ ------------
8,299,594 4,355,676 16,361,625
------------ ------------ ------------
TOTAL LONG TERM SECURITIES
(COST $443,606,387) ....................... 295,310,760 186,870,361 482,181,121
------------ ------------ ------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* AMOUNT* AMOUNT*
------------ ------------ ------------
SHORT TERM INVESTMENTS 1.1%
U.S. Treasury Bills, 4.59% to 4.81%
with maturities to 12/02/99 ............... $ 4,845,000 4,772,948 $ 729,000 717,422 $ 5,574,000 5,490,370
------------ ------------ ------------
TOTAL INVESTMENTS
(COST $449,087,809) 99.0% ................. 300,083,708 187,587,783 487,671,491
OTHER ASSETS, LESS LIABILITIES 1.0% ....... 3,024,212 1,802,110 4,826,322
------------ ------------ ------------
TOTAL NET ASSETS 100.0% ................... $303,107,920 $189,389,893 $492,497,813
============ ============ ============
</TABLE>
* Securities denominated in U.S. dollars.
a Non-income producing.
See accompanying notes to pro forma combining financial statements.
46
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP TEMPLETON
DEVELOPING
VIP MARKETS
TVP TEMPLETON EQUITY FUND
DEVELOPING DEVELOPING MARKETS PRO FORMA
MARKETS FUND EQUITY FUND COMBINED
--------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ........................................................... $272,632,324 $176,455,485 $449,087,809
--------------------------------------------------------
Value .......................................................... 300,083,708 187,587,783 487,671,491
Cash ............................................................ 1,707,046 336,898 2,043,944
Receivables:
Investment securities sold ..................................... 5,056,763 2,824,516 7,881,279
Capital shares sold ............................................ 215,579 583 216,162
Dividends and interest ......................................... 942,653 840,659 1,783,312
--------------------------------------------------------
Total assets ............................................... 308,005,749 191,590,439 499,596,188
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................ 4,026,453 1,386,072 5,412,525
Capital shares redeemed ........................................ -- 185,016 185,016
Affiliates ..................................................... 333,099 191,123 524,222
Equity in foreign currencies .................................... -- -- --
Deffered tax liability (Note 1j) ................................ 420,541 341,012 761,553
Other liabilities ............................................... 117,736 97,323 215,059
--------------------------------------------------------
Total liabilities .......................................... 4,897,829 2,200,546 7,098,375
--------------------------------------------------------
Net assets, at value ...................................... $303,107,920 $189,389,893 $492,497,813
========================================================
CLASS 1:
Net assets, at value ............................................ $268,035,925 $188,802,531 $456,838,456
========================================================
Shares outstanding** ............................................ 37,062,731 20,102,042 48,646,869
========================================================
Net asset value and offering price per share .................... $ 7.23 $ 9.39 $ 9.39
========================================================
CLASS 2:
Net assets, at value ............................................ $ 35,071,995 $ 587,362 $ 35,659,357
========================================================
Shares outstanding** ............................................ 4,862,951 62,613 3,801,632
========================================================
Net asset value and offering price per share .................... $ 7.21 $ 9.38 $ 9.38
========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
47
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
DEVELOPING
VIP MARKETS
TVP TEMPLETON EQUITY FUND
DEVELOPING DEVELOPING MARKETS PROFORMA PRO FORMA
MARKETS FUND EQUITY FUND ADJUSTMENTS COMBINED
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ................................................. $ 3,124,301 $ 2,475,116 $ 5,599,417
Interest .................................................. 143,566 6,057 149,623
-------------------------------------------------------------------
Total investment income .............................. 3,267,867 2,481,173 -- 5,749,040
-------------------------------------------------------------------
Expenses:
Management fees ........................................... 1,460,484 1,041,397 2,501,881
Administrative fees ....................................... 113,170 -- $171,910a 285,080
Distribution fees - Class 2 ............................... 29,391 39 (6) 29,424
Custodian fees ............................................ 138,500 105,800 244,300
Reports to shareholders ................................... 9,000 8,000 17,000
Professional fees ......................................... 12,400 11,500 23,900
Trustees' fees and expenses ............................... -- 600 600
Other ..................................................... 1,202 69 1,271
-------------------------------------------------------------------
Total expenses ....................................... 1,764,147 1,167,405 171,904 3,103,456
-------------------------------------------------------------------
Net investment income (loss) ....................... 1,503,720 1,313,768 (171,904) 2,645,584
-------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments .............................................. (28,889,873) (26,187,877) (55,077,750)
Foreign currency transactions ............................ (112,458) (45,691) (158,149)
-------------------------------------------------------------------
Net realized loss .................................... (29,002,331) (26,233,568) -- (55,235,899)
Net unrealized appreciation (depreciation) on:
Investments .............................................. 116,493,272 76,644,013 193,137,285
Deferred taxes ........................................... (420,541) 341,012 (79,529)
-------------------------------------------------------------------
Net unrealized gain .................................. 116,072,731 76,985,025 193,057,756
-------------------------------------------------------------------
Net realized and unrealized gain ........................... 87,070,400 50,751,457 -- 137,821,857
-------------------------------------------------------------------
Net increase in net assets resulting from operations ....... $ 88,574,120 $ 52,065,225 $ (171,904) $ 140,467,441
===================================================================
</TABLE>
a Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt an administrative fee based on the fund's
average net assets as follows:
First $200,000,000 0.150%
Next $500,000,000 0.135%
Next $500,000,000 0.100%
Over $1,200,000,000 0.075%
b Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
+ Net of foreign taxes of $393,488 and $319,010 for TVP Templeton Developing
Markets Fund and VIP Templeton Developing Markets Equity Fund,
respectively.
See accompanying notes to pro forma combining financial statements.
48
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
DEVELOPING
VIP MARKETS
TVP TEMPLETON EQUITY FUND
DEVELOPING DEVELOPING MARKETS PROFORMA PRO FORMA
MARKETS FUND EQUITY FUND ADJUSTMENTS COMBINED
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ...................................................... $ 4,090,258 $ 6,153,898 $ -- $ 10,244,156
Interest ....................................................... 1,927,642 1,121,539 -- 3,049,181
---------------------------------------------------------------
Total investment income ................................... 6,017,900 7,275,437 -- 13,293,337
---------------------------------------------------------------
Expenses:
Management fees ................................................ 2,255,183 2,633,409 -- 4,888,592
Administrative fees ............................................ 172,848 -- 385,120a 557,968
Distribution fees - Class 2 .................................... 33,388 -- -- 33,388
Transfer agent fees ............................................ -- -- --
Custodian fees ................................................. 476,000 268,600 -- 744,600
Reports to shareholders ........................................ 55,574 30,500 -- 86,074
Registration and filing fees ................................... 2,500 -- -- 2,500
Professional fees .............................................. 29,100 30,100 -- 59,200
Trustees' fees and expenses .................................... 5,000 1,100 -- 6,100
Other .......................................................... -- 5,617 -- 5,617
---------------------------------------------------------------
Total expenses ............................................ 3,029,593 2,969,326 385,120 6,384,039
Expenses waived/paid by affiliate ......................... -- -- -- --
---------------------------------------------------------------
Net expenses ............................................. 3,029,593 2,969,326 385,120 6,384,039
---------------------------------------------------------------
Net investment income (loss) ............................ 2,988,307 4,306,111 385,120 6,909,298
---------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................... (24,377,039) (27,190,328) -- (51,567,367)
Foreign currency transactions ................................. (428,784) (499,650) -- (928,434)
---------------------------------------------------------------
Net realized gain (loss) ................................. (24,805,823) (27,689,978) -- (52,495,801)
Net unrealized appreciation (depreciation) on investments ...... (20,073,422) (32,987,790) -- (53,061,212)
---------------------------------------------------------------
Net realized and unrealized gain (loss) ......................... (44,879,245) (60,677,768) -- (105,557,013)
---------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations . $ (41,890,938) $ (56,371,657) $ 385,120 $ (98,647,715)
===============================================================
</TABLE>
a Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt an administrative fee based on the fund's
average net assets as follows:
First $200,000,000 0.150%
Next $500,000,000 0.135%
Next $500,000,000 0.100%
Over $1,200,000,000 0.0750%
+ Net of foreign taxes of $422,818 and $32,708 for TVP Templeton Developing
Markets Fund and VIP Templeton Developing Markets Equity Fund,
respectively.
See accompanying notes to pro forma combining financial statements.
49
<PAGE>
TVP DEVELOPING MARKETS FUND
VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton Developing Markets Fund ("TVP Templeton Developing Markets
Fund"), the Franklin Templeton Variable Insurance Products Trust Templeton
Developing Markets Fund ("VIP Templeton Developing Markets") will acquire all
the net assets of the TVP Templeton Developing Markets Class 1 and 2 in exchange
for the Classes 1 and 2 shares, respectively, shares of VIP Templeton Developing
Markets. The merger will be accounted for by the method of accounting for tax
free business combinations of investment companies and TVP Templeton Developing
Markets Fund will be the accounting survivor. The pro forma combining Statement
of Assets and Liabilities reflects the financial position of TVP Templeton
Developing Markets June 30, 1999 as though the merger occurred as of that date.
The pro forma combining Statement of Operations reflects the results of
operations of the TVP Templeton Developing Markets and VIP Templeton Developing
Markets for the period January 1, 1999 to June 30, 1999 as though the merger
occurred on January 1, 1999. The pro forma financial statements do not reflect
the expenses of either fund in carrying out its obligations under the Agreement
and Plan of Reorganization or any adjustment with respect to additional
distributions that may be made prior to reorganization. The pro forma financial
statements are presented for the information of the reader, and should be read
in conjunction with the historical financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton Developing Markets at June 30, 1999 by the
Class 1 and 2 net asset value per share of the VIP Templeton Developing Markets,
respectively at June 30, 1999.
50
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 92.5%
AEROSPACE & MILITARY TECHNOLOGY .2%
Hong Kong Aircraft Engineering
Co. Ltd. .......................... 1,160,200 $ 2,242,987 513,400 $ 992,544 1,673,600 $ 3,235,531
------------ ------------ ------------
APPLIANCES & HOUSEHOLD DURABLES 2.7%
Electrolux AB, B ................... -- -- 1,160,000 24,286,050 1,160,000 24,286,050
Fisher & Paykel Ltd. ............... -- -- 1,321,125 4,200,382 1,321,125 4,200,382
Sony Corp. ......................... 215,200 23,201,917 215,200 23,201,917
------------ ------------ ------------
23,201,917 28,486,432 51,688,349
------------ ------------ ------------
AUTOMOBILES 3.8%
Autoliv Inc., SDR .................. 358,450 10,919,613 317,000 9,656,904 675,450 20,576,517
Fiat SpA ........................... 2,552,500 8,112,617 3,391,410 10,778,927 5,943,910 18,891,544
Volkswagen AG ...................... 156,000 10,065,917 -- -- 156,000 10,065,917
Volvo AB, B ........................ 672,100 19,486,315 91,500 2,652,876 763,600 22,139,191
------------ ------------ ------------
48,584,462 23,088,707 71,673,169
------------ ------------ ------------
BANKING 9.7%
Australia & New Zealand
Banking Group Ltd. ................ 1,745,350 12,833,660 -- -- 1,745,350 12,833,660
Banco Popular Espanol SA ........... 64,000 4,603,486 62,400 4,488,398 126,400 9,091,884
a Bangkok Bank Public Co. Ltd., fgn .. 2,763,800 10,343,170 -- -- 2,763,800 10,343,170
Bank Austria AG, 144A .............. 230,146 12,104,203 -- -- 230,146 12,104,203
BPI Socieda de Gestora de
Participacoes Socias SA ........... -- -- 321,978 6,756,989 321,978 6,756,989
Credit Commercial de France CCF .... -- -- 128,800 13,920,017 128,800 13,920,017
Credicorp Ltd. ..................... 292,160 3,213,760 -- -- 292,160 3,213,760
Foreningssparbanken AB, A .......... 228,000 3,218,066 244,500 3,450,953 472,500 6,669,019
Kookmin Bank ....................... -- -- 96,678 1,962,793 96,678 1,962,793
HSBC Holdings PLC, ADR ............. 30,100 10,978,818 30,100 10,978,818
Merita AS .......................... 3,400,000 19,319,377 1,254,500 7,128,282 4,654,500 26,447,659
National Bank of Canada ............ 440,000 5,802,528 447,000 5,894,841 887,000 11,697,369
National Westminster Bank PLC ...... 574,342 12,167,265 641,668 13,593,547 1,216,010 25,760,812
Svenska Handelsbanken, A ........... -- -- 466,200 5,593,084 466,200 5,593,084
Unibanco Uniao de Bancos
Brasileiros SA, GDR ............... -- -- 548,700 13,203,094 548,700 13,203,094
Unibanco Uniao de Bancos
Brasileiros SA, unit .............. -- -- 28,412,000 1,296,981 28,412,000 1,296,981
Unidanmark AS, A ................... 150,000 10,011,123 -- -- 150,000 10,011,123
Union Bank of Norway ............... -- -- 199,000 3,715,846 199,000 3,715,846
------------ ------------ ------------
104,595,456 81,004,825 185,600,281
------------ ------------ ------------
BROADCASTING & PUBLISHING 1.0%
Cordiant Communications Group PLC .. -- -- 3,561,500 9,852,200 3,561,500 9,852,200
NV Holdingsmig de Telegraaf ........ -- -- 504,000 9,927,194 504,000 9,927,194
------------ ------------ ------------
-- 19,779,394 19,779,394
------------ ------------ ------------
BUILDING MATERIALS & COMPONENTS 2.4%
Anglian Group PLC .................. -- -- 2,028,800 10,473,062 2,028,800 10,473,062
Caradon PLC ........................ 3,265,240 7,694,483 -- -- 3,265,240 7,694,483
Cie de Saint Gobain ................ -- -- 13,292 2,117,783 13,292 2,117,783
Hepworth PLC ....................... -- -- 1,330,100 4,130,224 1,330,100 4,130,224
Pioneer International Ltd. ......... -- -- 7,462,117 19,015,853 7,462,117 19,015,853
Unione Cementi Marchino Emiliane
(Unicem), di Risp .................. -- -- 468,000 2,195,937 468,000 2,195,937
------------ ------------ ------------
7,694,483 37,932,859 45,627,342
------------ ------------ ------------
BUSINESS & PUBLIC SERVICES .5%
Esselte AB, B ...................... -- -- 158,500 1,640,555 158,500 1,640,555
Lex Service PLC .................... -- -- 902,000 8,296,034 902,000 8,296,034
------------ ------------ ------------
-- 9,936,589 9,936,589
------------ ------------ ------------
CHEMICALS 2.6%
Akzo Nobel NV ...................... 352,800 14,844,014 129,200 5,436,073 482,000 20,280,087
BASF AG ............................ 273,530 12,016,477 273,530 12,016,477
DSM NV, Br ......................... -- -- 19,000 2,037,744 19,000 2,037,744
See accompanying notes to pro forma combining financial statements.
51
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
CHEMICALS (CONT.)
Imperial Chemical Industries PLC ... -- $ -- 857,000 $ 8,523,801 857,000 $ 8,523,801
Kemira OY .......................... 1,088,632 6,578,719 1,088,632 6,578,719
------------ ------------ ------------
33,439,210 15,997,618 49,436,828
------------ ------------ ------------
CONSTRUCTION & HOUSING .9%
Fairview Holdings PLC .............. -- -- 623,475 1,321,796 623,475 1,321,796
Fletcher Challenge Building Ltd. ... -- -- 4,627,000 6,742,575 4,627,000 6,742,575
Sirti SpA .......................... -- -- 1,833,800 8,850,350 1,833,800 8,850,350
------------ ------------ ------------
16,914,721 16,914,721
------------ ------------ ------------
DATA PROCESSING & REPRODUCTION .6%
a Newbridge Networks Corp. ........... 418,260 12,024,975 -- 418,260 12,024,975
------------ ------------ ------------
ELECTRICAL & ELECTRONICS 4.5%
a ABB Ltd. ........................... 64,840 6,110,292 -- -- 64,840 6,110,292
Alcatel SA ......................... 134,405 18,919,545 -- -- 134,405 18,919,545
General Electric Co. PLC ........... -- -- 1,920,000 19,520,192 1,920,000 19,520,192
Koninklijke Philips Electronics NV . 210,312 20,744,914 201,762 19,901,596 412,074 40,646,510
a Meto AG ............................ -- -- 158,500 784,857 158,500 784,857
------------ ------------ ------------
45,774,751 40,206,645 85,981,396
------------ ------------ ------------
ENERGY SOURCES 4.6%
Perez Companc SA, B ................ 1,975,000 11,357,386 -- -- 1,975,000 11,357,386
Repsol SA .......................... 807,000 16,477,880 -- -- 807,000 16,477,880
Shell Transport & Trading Co. PLC .. 1,913,742 14,336,022 -- -- 1,913,742 14,336,022
Societe Elf Aquitaine SA, Br ....... 106,150 15,577,132 148,024 21,721,992 254,174 37,299,124
a Total Fina SA, B ................... -- -- 62,039 8,003,588 62,039 8,003,588
------------ ------------ ------------
57,748,420 29,725,580 87,474,000
------------ ------------ ------------
FINANCIAL SERVICES 3.8%
AXA SA ............................. 130,000 15,859,544 -- -- 130,000 15,859,544
ING Groep NV ....................... 214,846 11,631,860 288,685 15,629,537 503,531 27,261,397
Lend Lease Corp. Ltd. .............. 1,040,000 14,279,005 -- -- 1,040,000 14,279,005
Nomura Securities Co. Ltd. ......... 1,210,000 14,165,317 -- -- 1,210,000 14,165,317
------------ ------------ ------------
55,935,726 15,629,537 71,565,263
------------ ------------ ------------
FOOD & HOUSEHOLD PRODUCTS 2.0%
Illovo Sugar Ltd. .................. 3,005,800 3,312,382 -- -- 3,005,800 3,312,382
McBride PLC ........................ -- -- 1,000,000 1,749,630 1,000,000 1,749,630
Northern Foods PLC ................. 2,868,307 5,900,099 -- -- 2,868,307 5,900,099
Panamerican Beverages Inc., A ...... 290,000 6,905,625 -- -- 290,000 6,905,625
Tate & Lyle PLC .................... 1,763,000 11,053,139 1,540,500 9,658,174 3,303,500 20,711,313
------------ ------------ ------------
27,171,245 11,407,804 38,579,049
------------ ------------ ------------
FOREST PRODUCTS & PAPER 3.0%
Carter Holt Harvey Ltd. ............ -- -- 3,243,400 3,884,208 3,243,400 3,884,208
Cartiere Burgo SpA ................. -- -- 696,200 4,472,136 696,200 4,472,136
Fletcher Challenge Ltd. Forestry
Division .......................... -- -- 6,020,000 3,381,395 6,020,000 3,381,395
Kimberly Clark de Mexico SA
de CV, A .......................... -- -- 1,115,000 4,619,541 1,115,000 4,619,541
Mayr-Melnhof Karton AG ............. -- -- 39,400 1,787,769 39,400 1,787,769
a PT Indah Kiat Pulp & Paper Corp. ...
TBK ............................... -- -- 9,724,297 4,519,644 9,724,297 4,519,644
a PT Indah Kiat Pulp & Paper Corp. ...
TBK, wts., 4/13/01 ................ -- -- 782,553 340,982 782,553 340,982
a PT Indah Kiat Pulp & Paper Corp. ...
TBK, wts., 7/11/02 ................ -- -- 818,888 249,770 818,888 249,770
Stora Enso OYJ, R .................. 400,000 4,289,987 1,167,304 12,631,377 1,567,304 16,921,364
Stora Enso OYJ, R, fgn ............. 435,426 4,711,737 186,900 2,004,496 622,326 6,716,233
Unipapel SA, Br .................... -- -- 104,400 1,185,360 104,400 1,185,360
UPM-Kymmene Corp. .................. 351,000 10,062,700 -- -- 351,000 10,062,700
------------ ------------ ------------
19,064,424 39,076,678 58,141,102
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
52
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE 2.7%
Internatio-Muller NV ............... -- $ -- 240,308 $ 5,290,890 240,308 $ 5,290,890
Medeva PLC ......................... 3,190,000 5,229,343 3,190,000 5,229,343
Nycomed Amersham PLC ............... -- -- 1,575,700 11,208,536 1,575,700 11,208,536
Rhone-Poulenc SA, A ................ 279,800 12,785,334 -- -- 279,800 12,785,334
Teva Pharmaceutical Industries
Ltd., ADR ......................... 335,200 16,424,800 -- -- 335,200 16,424,800
------------ ------------ ------------
34,439,477 16,499,426 50,938,903
------------ ------------ ------------
INDUSTRIAL COMPONENTS .7%
Granges AB ......................... -- -- 191,000 3,235,004 191,000 3,235,004
Madeco Manufacturera de Cobre SA,
ADR ................................ 190,000 1,923,750 -- -- 190,000 1,923,750
Meggitt PLC ........................ -- -- 1,487,610 4,584,152 1,487,610 4,584,152
Yamato Kogyo Co. Ltd. .............. 446,000 3,246,249 -- -- 446,000 3,246,249
------------ ------------ ------------
5,169,999 7,819,156 12,989,155
------------ ------------ ------------
INSURANCE 6.1%
Ace Ltd. ........................... 320,545 9,055,396 682,500 19,280,625 1,003,045 28,336,021
AXA China Region Ltd. .............. 11,930,000 9,533,114 11,930,000 9,533,114
Baloise-Holding .................... -- -- 7,380 6,019,452 7,380 6,019,452
Muenchener Rueckversicherungs-
Gesellschaft ....................... 27,260 5,136,024 33,000 6,217,490 60,260 11,353,514
a Muenchener Rueckversicherungs-
Gesellschaft, 144A ................. 27,260 5,088,232 33,000 6,159,637 60,260 11,247,869
Partnerre Ltd. ..................... 269,000 10,053,875 -- -- 269,000 10,053,875
Scor SA ............................ 250,000 12,400,743 -- -- 250,000 12,400,743
XL Capital Ltd., A ................. 170,450 9,630,425 -- -- 170,450 9,630,425
Zurich Allied AG ................... 32,300 18,366,911 -- -- 32,300 18,366,911
------------ ------------ ------------
79,264,720 37,677,204 116,941,924
------------ ------------ ------------
LEISURE & TOURISM .7%
Kuoni Reisen Holding AG, B ......... -- -- 3,570 13,766,982 3,570 13,766,982
------------ ------------ ------------
MACHINERY & ENGINEERING 2.1%
Bucher Holding AG, Br .............. -- -- 12,800 10,662,550 12,800 10,662,550
IHC Caland NV ...................... -- -- 375,000 14,695,267 375,000 14,695,267
Invensys PLC ....................... 1,318,675 6,246,049 1,820,854 8,624,675 3,139,529 14,870,724
------------ ------------ ------------
6,246,049 33,982,492 40,228,541
------------ ------------ ------------
MERCHANDISING 3.3%
David Jones Ltd. ................... 2,225,500 2,180,130 2,463,527 2,413,304 4,689,027 4,593,434
Hudsons Bay Co. .................... -- -- 357,000 4,024,940 357,000 4,024,940
Marks & Spencer PLC ................ 2,243,000 12,939,977 -- -- 2,243,000 12,939,977
Safeway PLC ........................ 3,247,408 12,988,711 1,695,778 6,782,631 4,943,186 19,771,342
Somerfield PLC ..................... -- -- 1,552,716 7,281,186 1,552,716 7,281,186
Storehouse ......................... 3,498,781 7,527,877 3,314,000 7,130,308 6,812,781 14,658,185
------------ ------------ ------------
35,636,695 27,632,369 63,269,064
------------ ------------ ------------
METALS & MINING 5.2%
Angang New Steel Company Ltd., H,
144A .............................. 22,414,000 3,351,043 -- -- 22,414,000 3,351,043
Anglo American Platinum Corp. Ltd. . 349,009 8,143,254 417,465 9,740,504 766,474 17,883,758
Boehler Uddeholm AG ................ 31,505 1,559,168 33,000 1,633,155 64,505 3,192,323
Boehler Uddeholm AG, 144A .......... 33,800 1,672,746 27,055 1,338,939 60,855 3,011,685
British Steel PLC .................. 4,090,000 10,588,924 4,033,200 10,441,870 8,123,200 21,030,794
Chongqing Iron & Steel Ltd., H ..... 25,564,000 2,471,114 -- -- 25,564,000 2,471,114
Companhia Siderurgica Nacional
CSN, ADR .......................... -- -- 276,365 7,254,581 276,365 7,254,581
Grupo Mexico SA de CV, B ........... -- -- 1,983,600 8,493,578 1,983,600 8,493,578
Ispat International NV, A .......... 227,600 2,517,825 -- -- 227,600 2,517,825
Pechiney SA, A ..................... 136,212 5,854,714 -- -- 136,212 5,854,714
See accompanying notes to pro forma combining financial statements.
53
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
METALS & MINING (CONT.)
Pohang Iron & Steel Co. Ltd. ....... 85,000 $ 10,597,000 10,450 $ 1,302,808 95,450 $ 11,899,808
WMC Ltd. ........................... 2,870,000 12,328,766 -- -- 2,870,000 12,328,766
------------ ------------ ------------
59,084,554 40,205,435 99,289,989
------------ ------------ ------------
MISC MATERIALS & COMMODITIES .4%
Korea Chemical Co. Ltd. ............ -- -- 57,900 5,202,246 57,900 5,202,246
Unitor ASA ......................... -- -- 295,000 2,548,111 295,000 2,548,111
------------ ------------ ------------
-- 7,750,357 7,750,357
------------ ------------ ------------
MULTI-INDUSTRY 3.9%
Alfa SA de CV, A ................... 2,110,000 8,820,769 -- -- 2,110,000 8,820,769
Broken Hill Proprietary Co. Ltd. ... 1,210,543 14,022,043 -- -- 1,210,543 14,022,043
Cheung Kong Holdings Ltd. .......... 850,000 7,559,110 188,600 1,677,233 1,038,600 9,236,343
Elementis PLC ...................... 2,052,331 3,412,896 3,336,000 5,547,555 5,388,331 8,960,451
Jardine Strategic Holdings Ltd. .... -- -- 2,574,940 6,694,844 2,574,940 6,694,844
Next PLC ........................... 1,255,500 15,257,881 -- -- 1,255,500 15,257,881
Saab AB, B ......................... 726,900 5,642,837 -- -- 726,900 5,642,837
Swire Pacific Ltd., B .............. -- -- 7,937,100 5,933,248 7,937,100 5,933,248
------------ ------------ ------------
54,715,536 19,852,880 74,568,416
------------ ------------ ------------
REAL ESTATE .3%
Hang Lung Development Co. Ltd. ..... -- -- 779,000 963,854 779,000 963,854
New Asia Realty and Trust
Co. Ltd., A ....................... 2,670,000 4,060,653 -- -- 2,670,000 4,060,653
------------ ------------ ------------
4,060,653 963,854 5,024,507
------------ ------------ ------------
RECREATION & OTHER CONSUMER GOODS 1.6%
Nintendo Co. Ltd. .................. 143,500 19,976,661 143,500 19,976,661
Swatch Group AG, Br ................ -- -- 15,400 10,361,765 15,400 10,361,765
Yue Yuen Industrial (Holdings) Ltd. -- -- 394,800 910,821 394,800 910,821
------------ ------------ ------------
19,976,661 11,272,586 31,249,247
------------ ------------ ------------
TELECOMMUNICATIONS 11.3%
a Cable & Wireless Optus Ltd., 144A .. 3,417,600 7,781,668 3,417,600 7,781,668
Cia de Telecomunicaciones de
Chile SA, ADR ..................... 431,500 10,679,625 -- -- 431,500 10,679,625
Hong Kong Telecommunications Ltd. .. 5,427,349 14,095,012 7,908,279 20,538,072 13,335,628 34,633,084
Koninklijke KPN NV ................. 263,235 12,351,441 263,235 12,351,441
a Korea Telecom Corp., ADR ........... 104,200 4,168,000 308,300 12,332,000 412,500 16,500,000
Nippon Telegraph & Telephone Corp. . 1,210 14,095,340 1,210 14,095,340
Nokia Corp., A ..................... -- -- 178,600 15,655,357 178,600 15,655,357
Smartone Telecommunications
Holdings Ltd. ...................... -- -- 1,602,000 5,698,680 1,602,000 5,698,680
a Telecom Italia SpA, di Risp ........ 2,252,750 12,254,570 -- -- 2,252,750 12,254,570
a Telecomunicacoes Brasileiras
SA, ADR ........................... 156,170 14,084,582 177,300 15,990,244 333,470 30,074,826
Telefonica de Argentina SA, ADR .... 368,800 11,571,100 -- -- 368,800 11,571,100
Telefonica del Peru SA, ADR ........ 29,000 438,625 251,900 3,809,988 280,900 4,248,613
Telefonica del Peru SA, B .......... 3,000,000 4,506,071 2,445,602 3,673,352 5,445,602 8,179,423
Telefonos de Mexico SA
(Telmex), ADR ..................... 191,300 15,459,431 191,300 15,459,431
a Telefonica SA ...................... -- -- 323,100 15,563,577 323,100 15,563,577
------------ ------------ ------------
121,485,465 93,261,270 214,746,735
------------ ------------ ------------
TEXTILES & APPAREL .3%
Yizheng Chemical Fibre Co. Ltd., H . -- 19,340,200 5,047,643 19,340,200 5,047,643
------------ ------------ ------------
TRANSPORTATION 2.7%
Air New Zealand Ltd., B ............ -- -- 1,132,000 2,339,401 1,132,000 2,339,401
a Helikopter Services Group ASA ...... -- -- 134,000 995,745 134,000 995,745
Hitachi Zosen Corp. ................ 3,342,000 4,031,163 -- -- 3,342,000 4,031,163
Koninklijke Nedlloyd Groep NV ...... 216,300 5,353,408 -- -- 216,300 5,353,408
Mayne Nickless Ltd., A ............. 3,227,820 11,045,691 2,125,500 7,273,521 5,353,320 18,319,212
Peninsular & Oriental Steam
Navigation Co. ..................... 833,414 12,538,912 -- -- 833,414 12,538,912
Singapore Airlines Ltd., fgn ....... 736,500 7,008,106 -- -- 736,500 7,008,106
Tranz Rail Holdings Ltd., ADR ...... -- -- 47,765 253,752 47,765 253,752
------------ ------------ ------------
39,977,280 10,862,419 50,839,699
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
54
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 8.9%
BG PLC ............................. -- -- 2,566,588 $ 15,666,454 2,566,588 $ 15,666,454
Centrais Eletricas Brasileiras SA
(Electrobras) ...................... -- -- 363,450,000 6,926,807 363,450,000 6,926,807
a Centrais Geradoras do Sul do
Brasil SA ......................... -- -- 363,450,000 290,345 363,450,000 290,345
Centrica PLC ....................... -- -- 1,161,000 2,731,302 1,161,000 2,731,302
Compania Sevillana de
Electricidad SA ................... -- -- 246,970 2,862,682 246,970 2,862,682
Evn AG ............................. 48,600 $ 7,106,816 -- -- 48,600 7,106,816
Gener SA, ADR ...................... 303,800 5,392,450 -- -- 303,800 5,392,450
Hong Kong Electric Holdings Ltd. ... 4,062,365 13,089,456 -- -- 4,062,365 13,089,456
Iberdrola SA, Br ................... 807,900 12,305,541 1,517,800 23,118,393 2,325,700 35,423,934
a Korea Electric Power Corp. ......... 269,000 11,178,315 66,000 2,742,635 335,000 13,920,950
National Grid Group PLC ............ 953,785 6,633,738 -- -- 953,785 6,633,738
National Power PLC ................. 1,972,900 14,328,263 -- -- 1,972,900 14,328,263
Shandong Huaneng Power
Development Co. Ltd., ADR ......... -- -- 338,300 1,754,931 338,300 1,754,931
Thames Water Group PLC ............. 747,372 11,862,861 896,939 14,236,903 1,644,311 26,099,764
Transportadora de Gas del Sur
SA, B, Reg S, ADR ................. -- -- 516,300 4,840,310 516,300 4,840,310
Veba AG ............................ 221,850 13,086,336 -- 221,850 13,086,336
------------ ------------ ------------
94,983,776 75,170,762 170,154,538
------------ ------------ ------------
TOTAL COMMON STOCKS
(COST $1,447,096,366) ............... 992,518,921 771,944,768 1,764,463,689
------------ ------------ ------------
PREFERRED STOCKS 2.2%
Banco Bradesco SA, pfd ............. 896,769,450 4,605,378 525,200,000 2,697,175 1,421,969,450 7,302,553
Banco Itau SA, pfd ................. -- -- 4,209,000 2,185,558 4,209,000 2,185,558
Cia Vale do Rio Doce, A, ADR, pfd .. 350,400 6,958,014 350,400 6,958,014
Lojas Americanas SA, pfd ........... 238,431,408 952,365 238,431,408 952,365
News Corp. Ltd., pfd ............... -- -- 3,486 26,558 3,486 26,558
Petroleo Brasileiro SA, pfd ........ -- -- 60,000,000 9,415,121 60,000,000 9,415,121
a Telecomunicacoes Brasileiras SA
(Telebras), ADR, pfd ............... 156,170 9,761 177,300 11,081 333,470 20,842
a Telecomunicacoes de Minas Gerais
Celular Telemig, pfd .............. 1,705,000 15,323 -- -- 1,705,000 15,323
Telesp Participacoes SA, pfd ....... 4,866,533 115,242 -- -- 4,866,533 115,242
Telesp Participacoes SA, ADR, pfd .. 334,800 7,658,550 -- -- 334,800 7,658,550
Usinas Siderurgicas de Minas
Gerais, Reg S, ADR, pfd ........... 320,000 1,088,274 1,851,400 6,296,345 2,171,400 7,384,619
------------ ------------ ------------
TOTAL PREFERRED STOCKS
(COST $56,534,968) .................. 21,402,907 20,631,838 42,034,745
------------ ------------ ------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* AMOUNT* AMOUNT*
------------ ------------ ------------
SHORT TERM INVESTMENT COST
($12,794,920) .7%
Federal National Mortgage
Association, 4.90%, 9/08/99 ....... $ 12,918,000 12,798,160 $ -- -- $ 12,918,000 12,798,160
------------ ------------ ------------
TOTAL INVESTMENTS BEFORE REPURCHASE
AGREEMENT (COST $1,516,426,254) .... 1,026,719,988 792,576,606 1,819,296,594
------------ ------------ ------------
See accompanying notes to pro forma combining financial statements.
55
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY
INTERNATIONAL FUND INTERNATIONAL EQUITY FUND FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALLUE AMOUNT* VALUE AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 3.9%
Paine Webber, 4.80%, 7/01/99
(Maturity Value $43,006,733)
Collaterized by U.S. Treasury
Bonds and Notes ................. $ 43,001,000 $ 43,001,000 $ -- $ -- $ 43,001,000 $ 43,001,000
Morgan Stanley Inc., 4.88%, 7/01/99
(Maturity Value $31,113,217)
Collateralized by U.S. Treasury
Notes and Bonds ................. -- -- 31,109,000 31,109,000 31,109,000 31,109,000
------------ ------------ ------------
TOTAL REPURCHASE AGREEMENT
(COST $74,110,000) ................. 43,001,000 31,109,000 74,110,000
------------ ------------ ------------
TOTAL INVESTMENTS
(COST $1,590,536,254) 99.3% ........ 1,069,720,988 823,685,606 1,893,406,594
OTHER ASSETS, LESS LIABILITIES .7% . 7,759,521 5,413,340 13,172,861
------------ ------------ ------------
TOTAL NET ASSETS 100.0% ............ $1,077,480,509 $829,098,946 $1,906,579,455
============ ============ ============
</TABLE>
* Securities denominated in U.S. dollars.
a Non-income producing.
See accompanying notes to pro forma combining financial statements.
56
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP TEMPLETON
INTERNATIONAL
TVP TEMPLETON VIP TEMPLETON EQUITY FUND
INTERNATIONAL INTERNATIONAL PRO FORMA
FUND EQUITY FUND COMBINED
----------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .......................................................... $ 876,135,516 $640,290,738 $1,516,426,254
----------------------------------------------------------
Value ......................................................... 1,026,719,988 792,576,606 1,819,296,594
Repurchase Agreements, at value and cost ....................... 43,001,000 31,109,000 74,110,000
Cash ........................................................... -- 400,884 400,884
Receivables:
Investment securities sold .................................... -- 1,306,512 1,306,512
Capital shares sold ........................................... 2,683,348 1,974,355 4,657,703
Dividends and interest ........................................ 6,265,179 3,501,787 9,766,966
----------------------------------------------------------
Total assets .............................................. 1,078,669,515 830,869,144 1,909,538,659
----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............................... 105,369 157,553 262,922
Capital shares redeemed ....................................... -- 627,401 627,401
Affiliates .................................................... 698,020 565,730 1,263,750
Funds advanced by custodian .................................... 34,450 -- 34,450
Other liabilities .............................................. 351,167 419,514 770,681
----------------------------------------------------------
Total liabilities ......................................... 1,189,006 1,770,198 2,959,204
----------------------------------------------------------
Net assets, at value ..................................... $1,077,480,509 $829,098,946 $1,906,579,455
==========================================================
CLASS 1:
Net assets, at value ........................................... $ 996,310,751 $824,805,932 $1,821,116,683
==========================================================
Shares outstanding** ........................................... 50,203,995 47,685,867 105,276,084
==========================================================
Net asset value and offering price per share ................... $ 19.85 $ 17.30 $ 17.30
==========================================================
CLASS 2:
Net assets, at value ........................................... $ 81,169,758 $ 4,293,014 $ 85,462,772
==========================================================
Shares outstanding** ........................................... 4,105,074 248,579 $ 4,948,623
==========================================================
Net asset value and offering price per share ................... $ 19.77 $ 17.27 $ 17.27
==========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
57
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
INTERNATIONAL
TVP TEMPLETON VIP TEMPLETON EQUITY FUND
INTERNATIONAL INTERNATIONAL PRO FORMA PRO FORMA
FUND EQUITY FUND ADJUSTMENTS COMBINED
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ...................................................... $ 17,654,395 $ 14,953,862 -- $ 32,608,257
Interest ....................................................... 883,934 1,189,313 -- 2,073,247
--------------------------------------------------------------
Total investment income ................................... 18,538,329 16,143,175 -- 34,681,504
--------------------------------------------------------------
Expenses:
Management fees ................................................ 3,511,590 3,540,668 (845,476)a 6,206,782
Administrative fees ............................................ 493,227 -- 498,023b 991,250
Distribution fees - Class 2 .................................... 66,442 1,313 (192) 67,563
Custodian fees ................................................. 177,000 299,100 -- 476,100
Reports to shareholders ........................................ 121,000 79,300 -- 200,300
Professional fees .............................................. 14,000 21,400 -- 35,400
Trustees' fees and expenses .................................... -- 4,000 -- 4,000
Other .......................................................... 4,022 5,334 -- 9,356
--------------------------------------------------------------
Total expenses ............................................ 4,387,281 3,951,115 (347,645) 7,990,751
--------------------------------------------------------------
Net investment income ................................... 14,151,048 12,192,060 347,645 26,690,753
--------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................... 60,537,527 90,886,731 -- 151,424,258
Foreign currency transactions ................................. (1,229,829) (1,165,446) -- (2,395,275)
--------------------------------------------------------------
Net realized gain ......................................... 59,307,698 89,721,285 -- 149,028,983
Net unrealized appreciation (depreciation) on investments ...... 30,280,684 (10,209,283) -- 20,071,401
--------------------------------------------------------------
Net realized and unrealized gain ................................ 89,588,382 79,512,002 -- 169,100,384
--------------------------------------------------------------
Net increase in net assets resulting from operations ............ $ 103,739,430 $ 91,704,062 $ 347,645 $ 195,791,137
==============================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule. The
combined entity will appoint a new advisor, Templeton Global Advisor
Limited and will adopt the following fee structure:
First $ 200,000,000 0.75%
Next $1,100,000,000 0.675%
Over $1,300,000,000 0.600%
b Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt the following management fee structure:
First $ 200,000,000 0.150%
Next $ 500,000,000 0.135%
Next $ 500,000,000 0.100%
Over $1,200,000,000 0.075%
c Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
+ Net of foreign taxes of $1,789,958 and $1,715,049 for TVP Templeton
International Fund and VIP Templeton International Fund, respectively.
See accompanying notes to pro forma combining financial statements.
58
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
INTERNATIONAL
TVP TEMPLETON VIP TEMPLETON EQUITY FUND
INTERNATIONAL INTERNATIONAL PRO FORMA PRO FORMA
FUND EQUITY FUND ADJUSTMENTS COMBINED
----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ........................................................... $ 31,386,965 $ 31,699,971 $ -- $ 63,086,936
Interest ............................................................ 6,412,315 10,196,096 -- 16,608,411
----------------------------------------------------------
Total investment income ........................................ 37,799,280 41,896,067 -- 79,695,347
----------------------------------------------------------
Expenses:
Management fees ..................................................... 7,098,752 8,900,761 (2,039,763)a 13,959,750
Administrative fees ................................................. 986,271 -- 1,193,073 b 2,179,344
Distribution fees - Class 2 ......................................... 74,364 -- -- 74,364
Custodian fees ...................................................... 437,000 634,000 -- 1,071,000
Reports to shareholders ............................................. 217,800 159,300 -- 377,100
Registration and filing fees ........................................ 6,000 -- -- 6,000
Professional fees ................................................... 29,000 49,800 -- 78,800
Trustees' fees and expenses ......................................... 22,000 7,300 -- 29,300
Other ............................................................... 31,763 25,789 -- 57,552
----------------------------------------------------------
Total expenses ................................................. 8,902,950 9,776,950 (846,690) 17,833,210
Net investment income (loss) .................................. 28,896,330 32,119,117 (846,690) 61,862,137
----------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................ 96,938,963 24,331,207 -- 121,270,170
Foreign currency transactions ...................................... (1,060,210) (325,036) -- (1,385,246)
----------------------------------------------------------
Net realized gain ............................................. 95,878,753 24,006,171 -- 119,884,924
Net unrealized appreciation (depreciation) on:
Investments ......................................................... (37,191,402) 3,813,638 -- (33,377,764)
Deferred taxes ...................................................... -- -- -- --
Translation of assets and liabilities denominated
in foreign currencies .............................................. -- -- -- --
----------------------------------------------------------
Net unrealized gain ........................................... (37,191,402) 3,813,638 -- (33,377,764)
----------------------------------------------------------
Net realized and unrealized gain ..................................... 58,687,351 27,819,809 -- 86,507,160
----------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ...... $ 87,583,681 $ 59,938,926 $(846,690) $ 148,369,297
==========================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule. The
combined entity will appoint a new advisor, Templeton Global Advisor
Limited and will adopt the following fee structure:
First $ 200,000,000 0.750%
Next $1,100,000,000 0.675%
Over $1,300,000,000 0.600%
b Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt the following management fee structure:
First $ 200,000,000 0.150%
Next $ 500,000,000 0.135%
Next $ 500,000,000 0.100%
Over $1,200,000,000 0.0750%
+ Net of foreign taxes of $3,722,358 and $3,957,832 for TVP Templeton
International Fund and VIP Templeton International Fund, respectively.
See accompanying notes to pro forma combining financial statements.
59
<PAGE>
TVP TEMPLETON INTERNATIONAL FUND
VIP TEMPLETON INTERNATIONAL EQUITY FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton International Fund("TVP Templeton International Fund"),
the Franklin Templeton Variable Insurance Products Trust Templeton International
Equity Fund ("VIP Templeton International Equity Fund") will acquire all the net
assets of the TVP Templeton International Class 1 and 2 in exchange for the
Classes 1 and 2 shares, respectively, shares of VIP Templeton International
Equity Fund. The merger will be accounted for by the method of accounting for
tax free business combinations of investment companies and TVP Templeton
International will be the accounting survivor. The pro forma combining Statement
of Assets and Liabilities reflects the financial position of TVP Templeton
International June 30, 1999 as though the merger occurred as of that date. The
pro forma combining Statement of Operations reflects the results of operations
of the TVP Templeton International and VIP Templeton International Equity for
the period January 1, 1999 to June 30, 1999 as though the merger occurred on
January 1, 1999. The pro forma financial statements do not reflect the expenses
of either fund in carrying out its obligations under the Agreement and Plan of
Reorganization or any adjustment with respect to additional distributions that
may be made prior to reorganization. The pro forma financial statements are
presented for the information of the reader, and should be read in conjunction
with the historical financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton International at June 30, 1999 by the
Class 1 and 2 net asset value per share of the VIP Templeton International
Equity, respectively at June 30, 1999.
60
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 92.1%
AEROSPACE & MILITARY TECHNOLOGY 2.6%
Boeing Co. ................................ 182,500 $ 8,064,219 210,769 $ 9,313,355 393,269 $ 17,377,574
a Fairchild Corp., A ........................ -- -- 204,957 2,613,202 204,957 2,613,202
Raytheon Co., A ........................... 230 15,841 222,644 15,334,606 222,874 15,350,447
------------ ------------- --------------
8,080,060 27,261,163 35,341,223
------------ ------------- --------------
APPLIANCES & HOUSEHOLD DURABLES 1.5%
Guangdong Kelon Electrical
Holdings. Ltd., H ........................ 1,123,000 1,309,878 1,123,000 1,309,878
Laox Co. Ltd. ............................. -- -- 725,000 6,289,243 725,000 6,289,243
Sony Corp. ................................ 124,100 13,379,916 -- -- 124,100 13,379,916
------------ ------------- --------------
14,689,794 6,289,243 20,979,037
------------ ------------- --------------
AUTOMOBILES 4.2%
Autoliv Inc., SDR ......................... -- -- 246,100 7,497,048 246,100 7,497,048
Delphi Automotive Systems Corp. ........... -- -- 41,935 778,418 41,935 778,418
Fiat SpA .................................. 1,307,680 4,156,203 1,919,720 6,101,451 3,227,400 10,257,654
Ford Motor Co. ............................ 117,000 6,603,188 90,000 5,079,375 207,000 11,682,563
General Motors Corp. ...................... -- -- 60,000 3,960,000 60,000 3,960,000
Volkswagen AG ............................. 102,400 6,607,371 63,000 4,065,082 165,400 10,672,453
Volvo AB, B ............................... 269,200 7,804,964 171,900 4,983,927 441,100 12,788,891
------------ ------------- --------------
25,171,726 32,465,301 57,637,027
------------ ------------- --------------
BANKING 4.1%
Australia & New Zealand Banking
Group Ltd. ............................... 542,900 3,991,975 -- -- 542,900 3,991,975
a Banca Nazionale Del Lavoro SpA ............ 1,781,960 5,619,505 -- -- 1,781,960 5,619,505
Banque Nationale de Paris ................. 62,054 5,170,633 -- -- 62,054 5,170,633
Deutsche Bank AG, Br ...................... 100,700 6,137,331 -- -- 100,700 6,137,331
HSBC Holdings PLC ......................... 153,404 5,595,331 223,724 8,160,216 377,128 13,755,547
Kookmin Bank, GDR, 144A ................... -- -- 293,927 5,981,414 293,927 5,981,414
Merita AS ................................. -- -- 320,600 1,821,704 320,600 1,821,704
Shinhan Bank Co. Ltd. ..................... -- -- 169,682 1,905,711 169,682 1,905,711
a Thai Farmers Bank Public Co. Ltd., fgn .... 1,492,300 4,613,483 1,492,300 4,613,483
Unibanco Uniao de Bancos
Brasileiros SA, GDR ...................... -- -- 149,000 3,585,313 149,000 3,585,313
Unidanmark AS, A .......................... 69,100 4,611,791 -- -- 69,100 4,611,791
------------ ------------- --------------
35,740,049 21,454,358 57,194,407
------------ ------------- --------------
BROADCASTING & PUBLISHING
News Corp. Ltd., ADR ...................... 112,400 3,969,125 -- -- 112,400 3,969,125
Television Broadcasts Ltd. ................ 1,023,000 4,799,319 -- -- 1,023,000 4,799,319
------------ ------------- --------------
8,768,444 -- 8,768,444
------------ ------------- --------------
BUILDING MATERIALS & COMPONENTS 1.5%
Caradon PLC ............................... -- -- 2,752,600 6,486,455 2,752,600 6,486,455
Nichiha Corp. ............................. -- -- 193,500 2,047,864 193,500 2,047,864
Okumura Corp. ............................. -- -- 2,093,000 7,781,312 2,093,000 7,781,312
a Siam City Cement Public Co. Ltd., fgn ..... -- -- 1,057,641 4,359,632 1,057,641 4,359,632
------------ ------------- --------------
-- 20,675,263 20,675,263
------------ ------------- --------------
BUSINESS & PUBLIC SERVICES 1.4%
a Complete Business Solutions Inc. .......... -- -- 23,600 423,325 23,600 423,325
a Humana Inc. ............................... -- -- 250,000 3,234,375 250,000 3,234,375
Kurita Water Industries Ltd. .............. 387,000 6,938,120 -- -- 387,000 6,938,120
Lex Service PLC ........................... 221,020 2,032,804 -- -- 221,020 2,032,804
Waste Management Inc. ..................... 135,917 7,305,539 -- -- 135,917 7,305,539
------------ ------------- --------------
16,276,463 3,657,700 19,934,163
------------ ------------- --------------
CHEMICALS 1.2%
Akzo Nobel NV ............................. 195,200 8,213,014 -- -- 195,200 8,213,014
BASF AG ................................... -- -- 70,900 3,114,716 70,900 3,114,716
Kemira OY ................................. -- -- 847,900 5,123,950 847,900 5,123,950
------------ ------------- --------------
8,213,014 8,238,666 16,451,680
------------ ------------- --------------
See accompanying notes to pro forma combining financial statements.
61
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
DATA PROCESSING & REPRODUCTION 1.6%
a 3Com Corp. ................................ 215,800 $ 5,759,163 220,600 $ 5,887,263 436,400 $ 11,646,426
a Newbridge Networks Corp. .................. 274,200 7,883,250 74,000 2,127,500 348,200 10,010,750
------------ ------------- --------------
13,642,413 8,014,763 21,657,176
------------ ------------- --------------
ELECTRICAL & ELECTRONICS 6.7%
a ABB Ltd. .................................. 79,406 7,425,049 55,976 5,234,150 135,382 12,659,199
Alcatel SA ................................ 78,835 11,097,223 -- -- 78,835 11,097,223
a Antec Corp. ............................... 345,500 11,077,594 345,500 11,077,594
Catic Shenzhen Holdings Ltd., H ........... -- -- 9,945,000 1,358,668 9,945,000 1,358,668
Dongfang Electrical Machinery
Co. Ltd., H .............................. -- -- 5,506,000 702,545 5,506,000 702,545
General Electric Co. PLC .................. -- -- 1,160,300 11,796,499 1,160,300 11,796,499
Hitachi Ltd. .............................. -- -- 603,500 5,659,059 603,500 5,659,059
Koninklijke Philips Electronics NV ........ 121,532 11,987,765 -- -- 121,532 11,987,765
Motorola Inc. ............................. 175,800 16,657,050 100,000 9,475,000 275,800 26,132,050
------------ ------------- --------------
58,244,681 34,225,921 92,470,602
------------ ------------- --------------
ELECTRONIC COMPONENTS & INSTRUMENTS 1.4%
BICC PLC .................................. -- -- 1,397,152 1,993,037 1,397,152 1,993,037
a Nanjing Panda Electronics Co. Ltd., H ..... -- -- 17,794,000 1,720,036 17,794,000 1,720,036
Hewlett-Packard Co. ....................... 85,000 8,542,500 -- -- 85,000 8,542,500
Intel Corp. ............................... 121,400 7,223,300 -- -- 121,400 7,223,300
------------ ------------- --------------
15,765,800 3,713,073 19,478,873
------------ ------------- --------------
ENERGY SOURCES 4.1%
MOL Magyar Olay-Es Gazipari RT,
GDS 144A ................................. -- -- 256,358 6,139,774 256,358 6,139,774
Norsk Hydro ASA ........................... 185,300 6,990,676 117,000 4,413,973 302,300 11,404,649
Perez Companc SA, B ....................... 415,400 2,388,789 -- -- 415,400 2,388,789
a Ranger Oil Ltd. ........................... -- -- 273,050 1,333,999 273,050 1,333,999
a Renaissance Energy Ltd. ................... -- -- 254,800 3,447,243 254,800 3,447,243
Shell Transport & Trading Co. PLC ......... -- -- 608,900 4,561,327 608,900 4,561,327
Societe Elf Aquitaine SA, Br .............. 61,320 8,998,490 67,072 9,842,576 128,392 18,841,066
a Total Fina SA, B .......................... 67,497 8,707,719 -- -- 67,497 8,707,719
------------ ------------- --------------
27,085,674 29,738,892 56,824,566
------------ ------------- --------------
FINANCIAL SERVICES 5.1%
AXA SA .................................... 57,091 6,964,902 92,702 11,309,319 149,793 18,274,221
Fannie Mae ................................ 144,200 9,859,675 -- -- 144,200 9,859,675
ICICI Ltd., GDR, 144A ..................... -- -- 396,700 4,086,010 396,700 4,086,010
ING Groep NV .............................. 157,637 8,534,539 105,188 5,694,926 262,825 14,229,465
Lend Lease Corp. Ltd. ..................... 485,500 6,665,824 -- -- 485,500 6,665,824
Morgan Stanley, Dean Witter & Co. ......... -- -- 103,100 10,567,750 103,100 10,567,750
Nomura Securities Co. Ltd. ................ 623,000 7,293,382 -- -- 623,000 7,293,382
------------ ------------- --------------
39,318,322 31,658,005 70,976,327
------------ ------------- --------------
FOOD & HOUSEHOLD PRODUCTS 2.1%
Archer-Daniels Midland Co. ................ 434,170 6,702,499 625,065 9,649,441 1,059,235 16,351,940
IBP Inc. .................................. -- -- 272,543 6,472,896 272,543 6,472,896
Northern Foods PLC ........................ -- -- 2,208,797 4,543,489 2,208,797 4,543,489
Showa Sangyo Co. .......................... -- -- 958,000 1,994,514 958,000 1,994,514
------------ ------------- --------------
6,702,499 22,660,340 29,362,839
------------ ------------- --------------
FOREST PRODUCTS & PAPER 2.7%
a Asia Pulp & Paper Co. Ltd., ADR ........... 29,000 279,125 -- -- 29,000 279,125
Assidoman AB .............................. -- -- 249,730 3,759,756 249,730 3,759,756
Carter Holt Harvey Ltd. ................... 1,155,252 1,383,499 940,712 1,126,571 2,095,964 2,510,070
Georgia Pacific Corp. ..................... 214,800 10,176,150 68,000 3,221,500 282,800 13,397,650
Georgia Pacific Timber Group .............. -- -- 34,000 858,500 34,000 858,500
Metsa Serla OY, B ......................... -- -- 270,000 2,294,318 270,000 2,294,318
Stora Enso OYJ, R ......................... 427,800 4,588,141 559,700 6,002,764 987,500 10,590,905
Stora Enso OYJ, R, fgn .................... 313,540 3,392,811 -- -- 313,540 3,392,811
------------ ------------- --------------
19,819,726 17,263,409 37,083,135
------------ ------------- --------------
See accompanying notes to pro forma combining financial statements.
62
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE 3.7%
Astrazeneca PLC ........................... 152,291 $ 5,928,996 -- $ -- 152,291 $ 5,928,996
Medeva PLC ................................ 2,761,300 4,526,579 1,614,200 2,646,146 4,375,500 7,172,725
Novartis AG ............................... 2,236 3,264,968 -- -- 2,236 3,264,968
Nycomed Amersham PLC ...................... 791,920 5,633,219 -- -- 791,920 5,633,219
Pharmacia & Upjohn Inc. ................... -- -- 218,900 12,436,256 218,900 12,436,256
Rhone-Poulenc SA, A ....................... 170,002 7,768,164 -- -- 170,002 7,768,164
a Skyepharma PLC ............................ 5,109,873 3,986,928 -- -- 5,109,873 3,986,928
Teva Pharmaceutical Industries
Ltd., ADR ................................ 107,400 5,262,600 107,400 5,262,600
------------ ------------- --------------
36,371,454 15,082,402 51,453,856
------------ ------------- --------------
INDUSTRIAL COMPONENTS 1.2%
Goodyear Tire & Rubber Co. ................ 99,000 5,822,438 -- -- 99,000 5,822,438
Granges AB ................................ 379,525 6,428,088 -- -- 379,525 6,428,088
Yamato Kogyo Co. Ltd. ..................... 539,000 3,923,158 -- -- 539,000 3,923,158
------------ ------------- --------------
16,173,684 -- 16,173,684
------------ ------------- --------------
INSURANCE 6.2%
Ace Ltd. .................................. 176,500 4,986,125 121,500 3,432,375 298,000 8,418,500
AXA China Region Ltd. ..................... 3,440,000 2,748,861 3,440,000 2,748,861
HIH Insurance Ltd. ........................ 2,303,465 2,851,125 2,244,429 2,778,053 4,547,894 5,629,178
Muenchener Rueckversicherungs-
Gesellschaft ............................. 13,445 2,533,156 -- -- 13,445 2,533,156
a Muenchener Rueckversicherungs-
Gesellschaft, 144A ....................... 13,445 2,509,585 -- -- 13,445 2,509,585
a Muenchener Rueckversicherungs-
Gesellschaft, wts .......................... 419 13,395 -- -- 419 13,395
Partnerre Ltd. ............................ 144,400 5,396,950 127,900 4,780,263 272,300 10,177,213
Reliastar Financial Corp. ................. 204,700 8,955,625 48,000 2,100,000 252,700 11,055,625
Torchmark Corp. ........................... 113,400 3,869,775 240,000 8,190,000 353,400 12,059,775
XL Capital Ltd., A ........................ 92,100 5,203,650 -- -- 92,100 5,203,650
UNUM Corp. ................................ -- -- 81,100 4,440,225 81,100 4,440,225
Zurich Allied AG .......................... 17,000 9,666,795 19,500 11,088,383 36,500 20,755,178
------------ ------------- --------------
48,735,042 36,809,299 85,544,341
------------ ------------- --------------
LEISURE & TOURISM .3%
Kuoni Reisen Holding AG, B ................ 1,065 4,106,957 -- 1,065 4,106,957
------------ ------------- --------------
MACHINERY & ENGINEERING 3.9%
First Tractor Company Ltd., H ............. -- -- 6,860,000 2,033,549 6,860,000 2,033,549
Invensys PLC .............................. 1,621,958 7,682,582 2,244,442 10,631,046 3,866,400 18,313,628
KCI Konecranes International PLC .......... -- -- 211,700 7,272,071 211,700 7,272,071
Laird Group PLC ........................... -- -- 1,783,700 7,422,477 1,783,700 7,422,477
Makita Corp. .............................. -- -- 653,000 7,385,633 653,000 7,385,633
New Holland NV ............................ 259,400 4,442,225 -- -- 259,400 4,442,225
VA Technologie AG, Br ..................... -- -- 25,900 2,346,411 25,900 2,346,411
Valmet OY ................................. -- -- 392,800 4,455,811 392,800 4,455,811
------------ ------------- --------------
12,124,807 41,546,998 53,671,805
------------ ------------- --------------
MERCHANDISING 3.8%
Coles Myer Ltd. ........................... -- -- 1,070,971 6,231,027 1,070,971 6,231,027
Home Depot Inc. ........................... 102,800 6,624,175 -- -- 102,800 6,624,175
Hudson's Bay Co. .......................... -- -- 67,100 756,508 67,100 756,508
Marks & Spencer PLC ....................... 1,067,200 6,156,729 1,516,900 8,751,070 2,584,100 14,907,799
Matsuzakaya Co. Ltd. ...................... -- -- 51,000 219,101 51,000 219,101
Safeway PLC ............................... 1,305,220 5,220,510 1,738,498 6,953,499 3,043,718 12,174,009
Sears Roebuck & Co. ....................... -- -- 155,900 6,947,294 155,900 6,947,294
Storehouse ................................ 2,067,800 4,449,020 -- -- 2,067,800 4,449,020
------------ ------------- --------------
22,450,434 29,858,499 52,308,933
------------ ------------- --------------
METALS & MINING 4.9%
Anglo American Platinum Corp. Ltd. ........ -- -- 377,265 8,802,537 377,265 8,802,537
Boehler-Uddeholm AG ....................... -- -- 93,200 4,612,424 93,200 4,612,424
Companhia Siderurgica Nacional Sid
Nacional CSN ............................. -- -- 129,100,000 3,407,061 129,100,000 3,407,061
See accompanying notes to pro forma combining financial statements.
63
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
METALS & MINING (CONT.)
Iluka Resources Ltd. ...................... -- $ -- 704,562 $ 1,523,100 704,562 $ 1,523,100
Industrias Penoles SA ..................... -- -- 1,104,000 3,218,281 1,104,000 3,218,281
Iscor Ltd. ................................ -- -- 9,558,700 2,993,776 9,558,700 2,993,776
Ispat International NV, A, Reg D .......... 228,000 2,522,250 -- -- 228,000 2,522,250
Outokumpu OY, A ........................... -- -- 342,200 3,846,530 342,200 3,846,530
Pechiney SA, A ............................ -- -- 84,279 3,622,511 84,279 3,622,511
Pechiney SA, ADR .......................... -- -- 112,708 2,409,134 112,708 2,409,134
Pohang Iron & Steel Co. Ltd. .............. -- -- 100,000 12,467,059 100,000 12,467,059
WMC Ltd. .................................. 2,183,784 9,380,963 2,150,656 9,238,653 4,334,440 18,619,616
------------ ------------- --------------
11,903,213 56,141,066 68,044,279
------------ ------------- --------------
MULTI-INDUSTRY 5.0%
Alfa SA de CV, A .......................... 1,743,100 7,286,958 1,743,100 7,286,958
Beijing Datang Power Generation
Co. Ltd., H .............................. -- -- 6,860,000 2,210,379 6,860,000 2,210,379
Broken Hill Proprietary Co. Ltd. .......... -- -- 867,854 10,052,585 867,854 10,052,585
Cheung Kong Holdings Ltd. ................. 815,000 7,247,852 1,180,000 10,493,823 1,995,000 17,741,675
DESC SA de CV DESC, B ..................... 4,018,300 4,419,486 -- -- 4,018,300 4,419,486
DESC SA de CV DESC, C ..................... 800 897 -- -- 800 897
Hutchison Whampoa Ltd. .................... 802,100 7,262,355 642,600 5,818,214 1,444,700 13,080,569
La Cemento Nacional SA, GDR, 144A ......... -- -- 3,600 259,200 3,600 259,200
La Cemento Nacional SA, GDR, Reg S ........ -- -- 400 28,800 400 28,800
Pacific Dunlop Ltd. ....................... -- -- 2,149,000 3,100,887 2,149,000 3,100,887
Saab AB, B ................................ -- -- 296,997 2,305,552 296,997 2,305,552
Saha Union Public Co. Ltd., fgn ........... -- -- 574,400 257,020 574,400 257,020
Swire Pacific Ltd., A ..................... -- -- 1,421,800 7,036,754 1,421,800 7,036,754
Swire Pacific Ltd., B ..................... -- -- 1,304,000 974,784 1,304,000 974,784
------------ ------------- --------------
26,217,548 42,537,998 68,755,546
------------ ------------- --------------
REAL ESTATE 1.9%
China Resources Beijing Land Ltd. ......... -- -- 4,652,000 1,067,241 4,652,000 1,067,241
General Growth Properties ................. -- -- 164,500 5,839,750 164,500 5,839,750
Hang Lung Development Co. Ltd. ............ -- -- 3,624,000 4,483,963 3,624,000 4,483,963
Highwoods Properties Inc. ................. -- -- 164,900 4,524,444 164,900 4,524,444
Inversiones y Representacion SA ........... -- -- 1,156,326 3,561,840 1,156,326 3,561,840
Inversiones y Representacion SA, GDR ...... -- -- 2,374 73,283 2,374 73,283
National Health Investors Inc. ............ 187,700 4,281,906 123,400 2,815,063 311,100 7,096,969
------------ ------------- --------------
22,365,584 26,647,490
------------- --------------
RECREATION & OTHER CONSUMER GOODS .1%
a Fila Holding SpA, ADR ..................... -- -- 60,600 715,838 60,600 715,838
------------ ------------- --------------
TELECOMMUNICATIONS 8.3%
AT&T Corp. ................................ -- -- 90,450 5,048,241 90,450 5,048,241
Cia de Telecomunicaciones de
Chile SA, ADR ............................ 117,300 2,903,175 -- -- 117,300 2,903,175
Embratel Participacoes SA ................. -- -- 27,300,000 205,626 27,300,000 205,626
a General Motors Corp., H ................... -- -- 66,000 3,712,500 66,000 3,712,500
Hong Kong Telecommunications Ltd. ......... 2,504,000 6,502,974 2,905,746 7,546,322 5,409,746 14,049,296
a Korea Telecom Corp., ADR .................. 88,900 3,556,000 -- -- 88,900 3,556,000
a Mastec Inc. ............................... 340,323 9,614,125 -- -- 340,323 9,614,125
Nippon Telegraph & Telephone Corp. ........ 675 7,863,103 -- -- 675 7,863,103
Nortel Networks Corp. ..................... 120,460 10,457,434 138,000 11,980,125 258,460 22,437,559
Telecom Argentina Stet-France SA, ADR ..... -- -- 100,000 2,675,000 100,000 2,675,000
a Telecom Italia SpA ........................ 763,200 7,913,763 -- -- 763,200 7,913,763
Telecomunicacoes Brasileiras SA, ADR ...... 41,800 3,769,838 -- -- 41,800 3,769,838
Telefonica De Argentina SA, ADR ........... -- -- 217,000 6,808,375 217,000 6,808,375
a Telefonica SA ............................. 142,300 6,854,525 -- -- 142,300 6,854,525
Telefonos de Mexico SA (Telmex), ADR ...... 117,500 9,495,469 92,900 7,507,481 210,400 17,002,950
Telesp Participacoes SA ................... -- -- 44,600,000 579,991 44,600,000 579,991
------------ ------------- --------------
68,930,406 46,063,661 114,994,067
------------ ------------- --------------
See accompanying notes to pro forma combining financial statements.
64
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
TEXTILES & APPAREL .5%
Courtaulds Textiles PLC ................... -- $ -- 734,300 $ 1,909,768 734,300 $ 1,909,768
a Fruit of the Loom Inc., A ................. -- -- 136,500 1,330,875 136,500 1,330,875
Yizheng Chemical Fibre Co. Ltd., H ........ -- -- 13,356,000 3,485,813 13,356,000 3,485,813
------------ ------------- --------------
-- 6,726,456 6,726,456
------------ ------------- --------------
TRANSPORTATION 4.1%
Air New Zealand Ltd., B ................... 700,100 1,446,833 700,100 1,446,833
British Airways PLC ....................... 928,000 6,414,174 1,205,032 8,328,970 2,133,032 14,743,144
Canadian National Railway Co. ............. 113,800 7,690,345 113,800 7,690,345
Firstgroup PLC ............................ 592,500 3,236,046 592,500 3,236,046
Koninklijke Frans Maas Groep NV ........... -- -- 160,970 4,813,994 160,970 4,813,994
Koninklijke Nedlloyd Groep NV ............. -- -- 260,670 6,451,562 260,670 6,451,562
Mayne Nickless Ltd., A .................... 1,388,800 4,752,513 -- -- 1,388,800 4,752,513
Peninsular & Oriental Steam
Navigation Co. ........................... 294,200 4,426,309 -- -- 294,200 4,426,309
Singapore Airlines Ltd., fgn .............. -- -- 944,600 8,988,264 944,600 8,988,264
------------ ------------- --------------
27,966,220 28,582,790 56,549,010
------------ ------------- --------------
UTILITIES ELECTRICAL & GAS 7.3%
Bses Ltd., GDR, 144A ...................... -- -- 202,200 2,027,055 202,200 2,027,055
Centrais Eletricas Brasileiras SA
(Eletrobras), ADR .......................... 514,400 4,901,843 -- -- 514,400 4,901,843
Electrabel SA ............................. -- -- 23,500 7,585,336 23,500 7,585,336
Entergy Corp. ............................. -- -- 283,900 8,871,875 283,900 8,871,875
Evn AG .................................... 58,920 8,615,918 35,400 5,176,570 94,320 13,792,488
Hong Kong Electric Holdings Ltd. .......... -- -- 2,944,000 9,485,942 2,944,000 9,485,942
Iberdrola SA, Br .......................... 486,500 7,410,132 744,700 11,342,909 1,231,200 18,753,041
Korea Electric Power Corp. ................ -- -- 186,600 7,754,177 186,600 7,754,177
National Grid Group PLC ................... -- -- 1,075,100 7,477,505 1,075,100 7,477,505
National Power PLC ........................ -- -- 747,800 5,430,927 747,800 5,430,927
Transportadora de Gas del Sur
SA, ADR .................................. -- -- 386,900 3,627,188 386,900 3,627,188
Veba AG ................................... 129,600 7,644,756 67,000 3,952,150 196,600 11,596,906
------------ ------------- --------------
28,572,649 72,731,634 101,304,283
------------ ------------- --------------
TOTAL COMMON STOCKS
(COST $1,012,794,748) ...................... 606,068,823 666,478,322 1,272,547,145
------------ ------------- --------------
PREFERRED STOCKS 2.8%
Banco Bradesco SA, pfd .................... -- -- 451,500,022 2,318,688 451,500,022 2,318,688
Banco Itau SA, pfd ........................ 6,309,400 3,276,208 6,309,400 3,276,208
Centrais Eletricas Brasileiras SA
(Electrobras), ADR, pfd .................. -- -- 176,400 1,796,713 176,400 1,796,713
Centrais Geradoras Do Sul Do Brasil SA,
ADR, pfd ................................. -- -- 17,640 71,466 17,640 71,466
Coteminas Cia Tecidos Norte
de Minas, pfd ............................ -- -- 1,952,000 164,848 1,952,000 164,848
Embotelladora Andina SA, B, ADR, pfd ...... 302,900 4,619,225 302,900 4,619,225
Embratel Participacoes SA, ADR, pfd ....... -- -- 98,400 1,365,300 98,400 1,365,300
a Empresa Nacional de Comercio Redito
Participacoes, pfd ....................... -- -- 1,952,000 1,682 1,952,000 1,682
News Corp. Ltd., ADR, pfd ................. 117,000 3,692,812 117,000 3,692,812
News Corp. Ltd., pfd ...................... 265,309 2,021,251 903,781 6,885,438 1,169,090 8,906,689
Tele Celular Sul Participacoes SA,
ADR, pfd ................................. -- -- 9,840 213,405 9,840 213,405
Tele Centro Oeste Celular Participacoes SA,
ADR, pfd ................................. -- -- 32,799 129,146 32,799 129,146
Tele Centro Sul Participacoes SA,
ADR, pfd ................................. -- -- 19,680 1,092,240 19,680 1,092,240
Tele Leste Celular Participacoes SA,
ADR, pfd ................................. -- -- 1,968 58,548 1,968 58,548
Tele Nordeste Celular Participacoes SA,
ADR, pfd ................................. -- -- 4,920 132,840 4,920 132,840
Tele Norte Celular Participacoes SA,
ADR, pfd ................................. -- -- 1,968 53,259 1,968 53,259
See accompanying notes to pro forma combining financial statements.
65
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)(CONT.)
VIP TEMPLETON
GLOBAL GROWTH FUND
TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED
---------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (CONT.)
Tele Norte Leste Participacoes SA,
ADR, pfd ................................. -- $ -- 98,400 $ 1,826,550 98,400 $ 1,826,550
Tele Sudeste Celular Participacoes SA,
ADR, pfd ................................. -- -- 19,680 570,720 19,680 570,720
a Telecomunicacoes Brasileiras SA
(Telebras), ADR, pfd ..................... 41,800 2,613 98,400 6,150 140,200 8,763
Telemig Celular Participacoes SA,
ADR, pfd ................................. -- -- 4,920 121,155 4,920 121,155
Telesp Celular Participacoes SA,
ADR, pfd ................................. -- -- 39,360 1,052,880 39,360 1,052,880
Telesp Participacoes SA, ADR, pfd ......... 205,300 4,696,237 98,400 2,250,900 303,700 6,947,137
------------ ------------- --------------
TOTAL PREFERRED STOCKS
(COST $36,995,705) ......................... 18,308,346 20,111,928 38,420,274
------------ ------------- --------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* AMOUNT* AMOUNT*
------------ ------------- --------------
BONDS 1.2%
Alfa SA de CV:
cvt., 8.00%, 9/15/00 ...................... -- -- $ 1,650,000 1,683,000 1,650,000 1,683,000
cvt., 144A, 8.00%, 9/15/00 ................ -- -- 2,710,000 2,764,200 2,710,000 2,764,200
AXA SA, cvt., 144A, 2.50%, 1/01/14 ........ 3,445,200 EUR 3,574,026 3,445,200 EUR 3,574,026
Government of Italy, cvt., 5.00%,
6/28/01 .................................. -- -- 4,950,000 8,167,500 4,950,000 8,167,500
RGC Ltd, zero coupon, 12/31/00 ............ -- 1,074,643 AUD 284,523 1,074,643 AUD 284,523
------------ ------------- --------------
TOTAL BONDS (COST $16,745,694) ............ -- 3,574,026 12,899,223 16,473,249
------------ ------------- --------------
SHORT TERM INVESTMENTS .4%
Federal National Mortgage Association,
4.71%, 7/13/99 ........................... 3,585,000 3,579,253 3,585,000 3,579,253
U.S. Treasury Bill, 4.41%, 8/26/99 ........ -- -- 1,407,000 1,397,716 1,407,000 1,397,716
------------ ------------- --------------
TOTAL SHORT TERM INVESTMENTS
(COST $4,976,079) ........................ 3,579,253 1,397,716 4,976,969
------------ ------------- --------------
TOTAL BEFORE REPURCHASE AGREEMENT
(COST $1,071,512,226) .................... 631,530,448 700,887,189 1,332,417,637
------------ ------------- --------------
REPURCHASE AGREEMENTS 3.7%
Barclays Bank PLC, 4.75%, 7/01/99
(Maturity Value $21,330,814)
Collateralized by U.S. Treasury Notes
and Bonds ................................ -- -- 21,328,000 21,328,000 21,328,000 21,328,000
Deutsche Bank,AG, 4.75%, 7/01/99
(Maturity Value $20,002,639)
Collateralized by U.S. Treasury Notes
and Bonds ................................ -- -- 20,000,000 20,000,000 20,000,000 20,000,000
Paine Webber Group Inc., 4.80%, 6/30/99
(Maturity Value $10,029,337)
Collateralized by U.S. Treasury Notes
and Bonds ................................ 10,028,000 10,028,000 -- -- 10,028,000 10,028,000
------------ ------------- --------------
TOTAL REPURCHASE AGREEMENTS
(COST $51,356,000) ......................... 10,028,000 41,328,000 51,356,000
------------ ------------- --------------
TOTAL INVESTMENTS
(COST $1,122,868,226) 100.1% ............... 640,842,610 742,215,189 1,383,057,799
OTHER ASSETS, LESS LIABILITIES (.1%) ...... 7,020,893 (8,570,369) (1,549,476)
------------ ------------- --------------
TOTAL NET ASSETS 100.0% ................... $647,863,503 $ 733,644,820 $1,381,508,323
============ ============= ==============
</TABLE>
Currency Abbreviations:
AUD - Australian Dollar
EUR - European Unit
*Securities traded in U.S. dollars unless otherwise indicated.
See accompanying notes to pro forma combining financial statements.
66
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL GROWTH
TVP TEMPLETON VIP TEMPLETON FUND
STOCK GLOBAL GROWTH PRO FORMA
FUND FUND COMBINED
----------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ........................................................... $470,524,685 $600,987,541 $1,071,512,226
----------------------------------------------------------
Value .......................................................... 630,814,610 700,887,189 1,331,701,799
Repurchase Agreements, at value and cost ...................... 10,028,000 41,328,000 51,356,000
Cash .......................................................... 1,491,932 1,959,957 3,451,889
Receivables:
Investment securities sold ..................................... 120,620 230,944 351,564
Capital shares sold ............................................ 3,225,239 749,832 3,975,071
Dividends and interest ......................................... 2,928,716 3,759,218 6,687,934
----------------------------------------------------------
Total assets ................................................... 648,609,117 748,915,140 1,397,524,257
----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................ -- 14,267,674 14,267,674
Capital shares redeemed ........................................ -- 408,130 408,130
Affiliates ..................................................... 423,469 498,068 921,537
Deffered tax liability ........................................ 61,431 -- 61,431
Other liabilities ............................................. 260,714 96,448 357,162
----------------------------------------------------------
Total liabilities .............................................. 745,614 15,270,320 16,015,394
----------------------------------------------------------
Net assets, at value .......................................... $647,863,503 $733,644,820 $1,381,508,323
==========================================================
CLASS 1:
Net assets, at value .......................................... $620,428,154 $732,163,775 $1,352,591,929
==========================================================
Shares outstanding** .......................................... 29,158,278 44,256,213 81,766,984
==========================================================
Net asset value and offering price per share .................. $ 21.28 $ 16.54 $ 16.54
==========================================================
CLASS 2:
Net assets, at value .......................................... $ 27,435,349 $ 1,481,045 $ 28,916,394
==========================================================
Shares outstanding** .......................................... 1,293,337 89,660 1,750,395
==========================================================
Net asset value and offering price per share .................. $ 21.21 $ 16.52 $ 16.52
==========================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
67
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL GROWTH
TVP TEMPLETON VIP TEMPLETON FUND
STOCK GLOBAL GROWTH PROFORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ................................................... $ 7,766,878 $ 11,344,030 $ -- $ 19,110,908
Interest .................................................... 193,686 1,288,395 -- 1,482,081
-----------------------------------------------------------------
Total investment income ...................................... 7,960,564 12,632,425 -- 20,592,989
-----------------------------------------------------------------
Expenses:
Management fees ............................................. 2,219,871 2,983,965 164,004a 5,367,840
Administrative fees ......................................... 307,861 -- (307,861)b --
Distribution fees - Class 2 ................................. 30,831 442 (75)c 31,198
Custodian fees .............................................. 47,000 111,000 -- 158,000
Reports to shareholders ..................................... 56,000 33,100 -- 89,100
Professional fees ........................................... 13,400 15,600 -- 29,000
Trustees' fees and expenses ................................. -- 2,800 -- 2,800
Other ....................................................... 551 6,134 -- 6,685
-----------------------------------------------------------------
Total expenses ............................................... 2,675,514 3,153,041 (143,932) 5,684,623
-----------------------------------------------------------------
Net investment loss .......................................... 5,285,050 9,479,384 143,932 14,908,366
-----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................. 17,509,630 17,344,632 -- 34,854,262
Foreign currency transactions ................................ (447,977) (506,819) -- (954,796)
-----------------------------------------------------------------
Net realized gain ............................................ 17,061,653 16,837,813 -- 33,899,466
Net unrealized appreciation (depreciation) on:
Investments .................................................. 53,008,541 54,339,968 -- 107,348,509
Deferred taxes ............................................... (61,431) -- -- (61,431)
-----------------------------------------------------------------
Net unrealized gain .......................................... 52,947,110 54,339,968 107,287,078
-----------------------------------------------------------------
Net realized and unrealized gain ............................. 70,008,763 71,177,781 -- 141,186,544
-----------------------------------------------------------------
Net increase in net assets resulting from operations ......... $ 75,293,813 $ 80,657,165 $ 143,932 $ 156,094,910
=================================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule.
b Pro Forma adjustment for difference in Administrative fee schedule.
c Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
+ Net of foreign taxes of $752,149 and $1,090,514 for TVP Templeton Stock
Fund and VIP Templeton Global Growth Fund, respectively.
See accompanying notes to pro forma combining financial statements.
68
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL GROWTH
TVP TEMPLETON VIP TEMPLETON FUND
STOCK GLOBAL GROWTH PROFORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ........................................................... $ 18,051,815 $ 19,581,841 $ -- $ 37,633,656
Interest ............................................................ 569,286 4,859,793 -- 5,429,079
----------------------------------------------------------
Total investment income ........................................ 18,621,101 24,441,634 -- 43,062,735
----------------------------------------------------------
Expenses:
Management fees ..................................................... 5,100,755 6,409,332 400,084 a 11,910,171
Administrative fees ................................................. 702,686 -- (702,686)b --
Distribution fees - Class 2 ......................................... 53,988 -- (53,988)c --
Transfer agent fees ................................................. -- -- -- --
Custodian fees ...................................................... 445,000 269,500 -- 714,500
Reports to shareholders ............................................. 204,000 104,500 -- 308,500
Registration and filing fees ........................................ -- -- -- --
Professional fees ................................................... 53,600 29,900 -- 83,500
Trustees' fees and expenses ......................................... 18,000 4,600 -- 22,600
Other ............................................................... 13,396 3,682 -- 17,078
----------------------------------------------------------
Total expenses ................................................. 6,591,425 6,821,514 (356,590) 13,056,349
Expenses waived/paid by affiliate .............................. -- -- -- --
----------------------------------------------------------
Net expenses .................................................. 6,591,425 6,821,514 (356,590) 13,056,349
----------------------------------------------------------
Net investment income (loss) ................................. 12,029,676 17,620,120 (356,590) 30,006,386
----------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................ 47,606,776 75,957,066 -- 123,563,842
Foreign currency transactions ...................................... (37,819) 196,827 -- 159,008
----------------------------------------------------------
Net realized gain ............................................. 47,568,957 76,153,893 -- 123,722,850
Net unrealized appreciation (depreciation) on:
Investments ......................................................... (47,396,839) (33,429,013) -- (80,825,852)
Deferred taxes ...................................................... -- -- -- --
Translation of assets and liabilities
denominated in foreign currencies .................................. -- -- -- --
----------------------------------------------------------
Net unrealized gain ........................................... (47,396,839) (33,429,013) -- (80,825,852)
----------------------------------------------------------
Net realized and unrealized gain ..................................... 172,118 42,724,880 -- 42,896,998
----------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ...... $ 12,201,794 $ 60,345,000 $(356,590) $ 72,903,384
==========================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule.
b Pro Forma adjustment for difference in Administrative fee schedule.
c Pro Forma adjustment for difference in 12B-1 agreement.
+ Net of foreign taxes of $2,092,812 and $1,986,307 for TVP Templeton Stock
Fund and VIP Templeton Global Growth Fund, respectively.
See accompanying notes to pro forma combining financial statements.
69
<PAGE>
TVP TEMPLETON STOCK FUND
VIP TEMPLETON GLOBAL GROWTH FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton Stock Fund ("TVP Templeton Stock Fund"), the Franklin
Templeton Variable Insurance Products Trust Templeton Global Growth Fund ("VIP
Templeton Global Growth Fund") will acquire all the net assets of the TVP
Templeton Stock Class 1 and 2 in exchange for the Classes 1 and 2 shares,
respectively, shares of VIP Templeton Global Growth Fund. The merger will be
accounted for by the method of accounting for tax free business combinations of
investment companies. The pro forma combining Statement of Assets and
Liabilities reflects the financial position of TVP Templeton Stock Fund June 30,
1999 as though the merger occurred as of that date. The pro forma combining
Statement of Operations reflects the results of operations of the TVP Templeton
Stock and VIP Templeton Global Growth for the period Jan uary 1, 1999 to June
30, 1999 as though the merger occurred on Jan uary 1, 1999. The pro forma
financial statements do not reflect the expenses of either fund in carrying out
its obligations under the Agreement and Plan of Reorganization or any adjustment
with respect to additional distributions that may be made prior to
reorganization. The pro forma financial statements are presented for the
information of the reader, and should be read in conjunction with the historical
financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton Stock at June 30, 1999 by the Class 1 and
2 net asset value per share of the VIP Templeton Global Growth , respectively at
June 30, 1999.
70
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 74.5%
AEROSPACE & MILITARY TECHNOLOGY 1.0%
Alvis Plc .................................. -- $ -- 140,990 $ 382,243 140,990 $ 382,243
Boeing Co. ................................. -- -- 21,217 937,526 21,217 937,526
Hong Kong Aircraft Engineering
Co. Ltd. .................................. -- -- 363,200 702,166 363,200 702,166
Kaman Corp., A ............................. -- -- 40,300 632,206 40,300 632,206
Raytheon Co., A ............................ -- -- 17,615 1,213,233 17,615 1,213,233
Rolls-Royce PLC ............................ 770,000 3,261,838 121,085 512,935 891,085 3,774,773
----------- ----------- -----------
3,261,838 4,380,309 7,642,147
----------- ----------- -----------
APPLIANCES & HOUSEHOLD DURABLES 1.4%
Laox Co. Ltd. .............................. -- -- 70,000 607,237 70,000 607,237
Sony Corp. ................................. 92,400 9,962,161 -- -- 92,400 9,962,161
----------- ----------- -----------
9,962,161 607,237 10,569,398
----------- ----------- -----------
AUTOMOBILES 4.6%
Autoliv Inc. ............................... 246,900 7,468,725 -- -- 246,900 7,468,725
Autoliv Inc., SDR .......................... 129,000 3,929,781 -- -- 129,000 3,929,781
Delphi Automotive Systems Corp. ............ -- -- 1,887 35,030 1,887 35,030
Fiat SpA ................................... 2,361,700 7,506,197 -- -- 2,361,700 7,506,197
Ford Motor Co. ............................. 84,000 4,740,750 -- -- 84,000 4,740,750
General Motors Corp. ....................... 40,000 2,640,000 2,700 178,200 42,700 2,818,200
Volvo AB, B ................................ 260,000 7,538,226 -- -- 260,000 7,538,226
----------- ----------- -----------
33,823,679 213,230 34,036,909
----------- ----------- -----------
BANKING 4.8%
* Banca Nazionale Del Lavoro SpA ............. -- -- 225,160 710,054 225,160 710,054
* Bangkok Bank Public Co. Ltd., fgn .......... -- -- 193,400 723,775 193,400 723,775
Canadian Imperial Bank of Commerce ......... 140,000 3,357,704 -- -- 140,000 3,357,704
Den Norske Bank ............................ 2,178,900 7,196,113 -- -- 2,178,900 7,196,113
Deutsche Bank AG, Br ....................... 121,400 7,398,928 -- -- 121,400 7,398,928
Foreningssparbanken AB, A .................. 170,700 2,409,315 -- -- 170,700 2,409,315
Merita AS .................................. 2,453,000 13,938,362 -- -- 2,453,000 13,938,362
----------- ----------- -----------
34,300,422 1,433,829 35,734,251
----------- ----------- -----------
BROADCASTING & PUBLISHING .2%
South China Morning Post Ltd. .............. 2,821,000 1,581,594 -- -- 2,821,000 1,581,594
----------- ----------- -----------
BUILDING MATERIALS & COMPONENTS .5%
Caradon PLC ................................ -- -- 295,300 695,869 295,300 695,869
Gujarat Ambuja Cements Ltd. ................ -- -- 200 1,476 200 1,476
Gujarat Ambuja Cements Ltd.,
GDR, 144A ................................. -- -- 14,600 119,720 14,600 119,720
Pioneer International Ltd. ................. 969,005 2,469,334 969,005 2,469,334
Plettac AG ................................. -- -- 5,192 263,428 5,192 263,428
----------- ----------- -----------
2,469,334 1,080,493 3,549,827
----------- ----------- -----------
BUSINESS & PUBLIC SERVICES 1.6%
Columbia HCA Healthcare Corp. .............. -- -- 13,600 310,250 13,600 310,250
a Humana Inc. ................................ -- -- 18,200 235,463 18,200 235,463
Kurita Water Industries Ltd. ............... 432,000 7,744,878 -- -- 432,000 7,744,878
Laidlaw Inc. ............................... 549,130 4,049,834 -- -- 549,130 4,049,834
a Lifepoint Hospitals Inc. ................... -- -- 716 9,618 716 9,618
a Triad Hospitals Inc. ....................... -- -- 715 9,653 715 9,653
----------- ----------- -----------
11,794,712 564,984 12,359,696
----------- ----------- -----------
CHEMICALS 1.7%
Akzo Nobel NV .............................. 98,800 4,156,997 12,105 509,316 110,905 4,666,313
DSM NV, Br ................................. 25,000 2,681,242 -- -- 25,000 2,681,242
Hoechst AG ................................. 118,200 5,326,740 -- -- 118,200 5,326,740
Shanghai Petrochemical Co. Ltd., H ......... -- -- 834,000 196,707 834,000 196,707
----------- ----------- -----------
12,164,979 706,023 12,871,002
----------- ----------- -----------
DATA PROCESSING & REPRODUCTION .9%
a 3Com Corp. ................................. 240,800 6,426,350 25,400 677,863 266,200 7,104,213
----------- ----------- -----------
See accompanying notes to pro forma combining financial statements.
71
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS 4.7%
Alcatel SA ................................. 92,119 $12,967,148 -- $ -- 92,119 $12,967,148
Alcatel SA, ADR ............................ 185,738 5,270,316 -- -- 185,738 5,270,316
General Electric Co. PLC ................... -- -- 101,500 1,031,927 101,500 1,031,927
Koninklijke Philips Electronics NV ......... 56,856 5,608,205 10,396 1,025,448 67,252 6,633,653
Motorola Inc. .............................. 94,000 8,906,500 4,310 408,373 98,310 9,314,873
----------- ----------- -----------
32,752,169 2,465,748 35,217,917
----------- ----------- -----------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.6%
Hewlett-Packard Co. ........................ 106,000 10,653,000 -- -- 106,000 10,653,000
Intel Corp. ................................ 144,000 8,568,000 -- -- 144,000 8,568,000
----------- ----------- -----------
19,221,000 -- 19,221,000
----------- ----------- -----------
ENERGY EQUIPMENT & SERVICES .1%
Sunoco Inc. ................................ -- -- 17,500 528,281 17,500 528,281
----------- ----------- -----------
ENERGY SOURCES 4.3%
a Consol Energy .............................. 584,000 7,008,000 -- -- 584,000 7,008,000
a Ranger Oil Ltd. ............................ 1,153,490 5,695,357 -- -- 1,153,490 5,695,357
a Rao Gazprom, Reg S, ADR .................... -- -- 14,201 160,116 14,201 160,116
a Renaissance Energy Ltd. .................... 549,350 7,432,272 -- -- 549,350 7,432,272
MOL Magyar Olay-Es Gazipari RT,
GDS 144A .................................. -- -- 12,107 289,963 12,107 289,963
Shell Transport & Trading Co. PLC .......... 1,525,600 11,428,413 1,525,600 11,428,413
Societe Elf Aquitaine SA, Br ............... -- -- 1,805 264,877 1,805 264,877
----------- ----------- -----------
31,564,042 714,956 32,278,998
----------- ----------- -----------
FINANCIAL SERVICES 5.1%
AXA SA ..................................... 97,600 11,906,858 11,271 1,375,022 108,871 13,281,880
ING Groep NV ............................... 222,100 12,024,595 13,432 727,215 235,532 12,751,810
Nomura Securities Co. Ltd. ................. 1,000,600 11,713,898 -- -- 1,000,600 11,713,898
----------- ----------- -----------
35,645,351 2,102,237 37,747,588
----------- ----------- -----------
FOOD & HOUSEHOLD PRODUCTS .1%
Archer-Daniels Midland Co. ................. -- -- 29,547 456,132 29,547 456,132
----------- ----------- -----------
FOREST PRODUCTS & PAPER 1.5%
Assidoman AB ............................... 90,000 1,761,468 90,000 1,761,468
Cartiere Burgo SpA ......................... -- -- 34,500 221,615 34,500 221,615
Georgia Pacific Corp. ...................... -- -- 5,000 236,875 5,000 236,875
International Paper Co. .................... 50,000 2,525,000 -- -- 50,000 2,525,000
Mo Och Domsjoe AB, B ....................... -- -- 9,575 222,989 9,575 222,989
Stora Enso OYJ, R .......................... 225,000 2,413,117 -- -- 225,000 2,413,117
Stora Enso OYJ, R, fgn ..................... 326,569 3,533,798 -- -- 326,569 3,533,798
----------- ----------- -----------
10,233,383 681,479 10,914,862
----------- ----------- -----------
HEALTH & PERSONAL CARE 4.7%
Medeva PLC ................................. 4,572,675 7,495,952 -- -- 4,572,675 7,495,952
Ono Pharmaceutical Co Ltd. ................. 247,000 8,427,875 -- -- 247,000 8,427,875
Rhone-Poulenc SA, A ........................ 201,800 9,221,159 9,870 451,005 211,670 9,672,164
Teva Pharmaceutical Industries
Ltd., ADR ................................. 197,200 9,662,800 -- -- 197,200 9,662,800
----------- ----------- -----------
34,807,786 451,005 35,258,791
----------- ----------- -----------
INDUSTRIAL COMPONENTS .3%
Goodyear Tire & Rubber Co. ................. -- -- 3,600 211,725 3,600 211,725
Madeco Manufacturera de Cobre
SA, ADR ................................... 162,500 1,645,313 18,685 189,186 181,185 1,834,499
Weir Group PLC ............................. -- -- 123,370 517,266 123,370 517,266
----------- ----------- -----------
1,645,313 918,177 2,563,490
----------- ----------- -----------
INSURANCE 5.0%
Ace Ltd. ................................... -- -- 25,200 711,900 25,200 711,900
Aetna Inc. ................................. 16,700 1,493,606 7,190 643,056 23,890 2,136,662
Allstate Corp. ............................. 80,000 2,870,000 -- -- 80,000 2,870,000
AXA China Region Ltd. ...................... -- -- 489,000 390,754 489,000 390,754
Partnerre Ltd. ............................. -- -- 17,500 654,063 17,500 654,063
Reinsurance Australia Corp. Ltd. ........... 829,055 691,428 375,684 313,319 1,204,739 1,004,747
See accompanying notes to pro forma combining financial statements.
72
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
INSURANCE (CONT.)
Reliastar Financial Corp. .................. -- $ -- 18,310 $ 801,063 18,310 $ 801,063
SCOR SA .................................... -- -- 18,000 892,853 18,000 892,853
Torchmark Corp. ............................ 90,000 3,071,250 22,400 764,400 112,400 3,835,650
UNUM Corp. ................................. -- -- 18,530 1,014,518 18,530 1,014,518
Waddell & Reed Financial Inc., B ........... -- -- 5,485 148,095 5,485 148,095
XL Capital Ltd., A ......................... 179,400 10,136,100 -- -- 179,400 10,136,100
Zurich Allied AG ........................... 20,400 11,600,154 1,390 790,403 21,790 12,390,557
----------- ----------- -----------
29,862,538 7,124,424 36,986,962
----------- ----------- -----------
LEISURE & TOURISM .1%
Mandarin Oriental International Ltd. ....... -- -- 524,000 461,120 524,000 461,120
----------- ----------- -----------
MACHINERY & ENGINEERING .3%
Invensys PLC ............................... -- -- 186,454 883,160 186,454 883,160
Makita Corp. ............................... -- -- 59,000 667,308 59,000 667,308
Mckechnie Group PLC ........................ -- -- 101,800 779,041 101,800 779,041
----------- ----------- -----------
-- 2,329,509 2,329,509
----------- ----------- -----------
MERCHANDISING 2.4%
Best Denki Co. Ltd. ........................ -- -- 24,000 190,549 24,000 190,549
Dairy Farm International Holdings Ltd. ..... 1,000,000 1,200,000 1,000,000 1,200,000
David Jones Ltd. ........................... -- -- 345,909 338,857 345,909 338,857
Marks & Spencer PLC ........................ 1,232,600 7,110,930 1,232,600 7,110,930
Matsuzakaya Co. Ltd. ....................... -- -- 115,000 494,052 115,000 494,052
Sears Roebuck & Co. ........................ 42,000 1,871,625 -- -- 42,000 1,871,625
Storehouse ................................. 3,079,116 6,624,938 -- -- 3,079,116 6,624,938
----------- ----------- -----------
16,807,493 1,023,458 17,830,951
----------- ----------- -----------
METALS & MINING 1.8%
Anglo American Platinum Corp. Ltd. ......... -- 402 9,380 402 9,380
British Steel PLC, ADR ..................... 394,300 10,276,444 -- -- 394,300 10,276,444
Companhia Siderurgica Nacional Sid
Nacional CSN .............................. -- -- 16,300,000 430,171 16,300,000 430,171
Companhia Siderurgica Nacional Sid
Nacional CSN, ADR ......................... -- -- 7,700 202,125 7,700 202,125
Elkem ASA, A ............................... -- -- 49,700 883,836 49,700 883,836
Industrias Penoles SA ...................... -- -- 168,200 490,321 168,200 490,321
Pohang Iron & Steel Co. Ltd. ............... -- -- 6,690 834,046 6,690 834,046
----------- ----------- -----------
10,276,444 2,849,879 13,126,323
----------- ----------- -----------
MISC MATERIALS & COMMODITIES .6%
Agrium Inc. ................................ 517,000 4,556,063 -- -- 517,000 4,556,063
----------- ----------- -----------
MULTI-INDUSTRY 3.5%
Alfa SA de CV, A ........................... 1,150,000 4,807,528 127,251 531,968 1,277,251 5,339,496
Broken Hill Proprietary Co. Ltd. ........... -- -- 75,894 879,100 75,894 879,100
Cheung Kong Holdings Ltd. .................. 600,000 5,335,842 89,500 795,930 689,500 6,131,772
Elementis PLC .............................. -- -- 82,194 136,683 82,194 136,683
Hunting PLC ................................ -- -- 261,410 607,767 261,410 607,767
Hutchison Whampoa Ltd. ..................... -- -- 79,000 715,280 79,000 715,280
Pilkington PLC ............................. -- -- 454,300 643,977 454,300 643,977
Saab AB, B ................................. -- -- 54,400 422,301 54,400 422,301
Swire Pacific Ltd., A ...................... 2,200,000 10,888,212 -- -- 2,200,000 10,888,212
Swire Pacific Ltd., B ...................... -- 945,000 706,419 945,000 706,419
----------- ----------- -----------
21,031,582 5,439,425 26,471,007
----------- ----------- -----------
REAL ESTATE .3%
Highwoods Properties Inc. .................. -- -- 16,600 455,463 16,600 455,463
Hon Kwok Land Investment Co. Ltd. .......... -- -- 1,226,456 126,458 1,226,456 126,458
New World Development Co. Ltd. ............. 303,543 909,590 -- -- 303,543 909,590
Rouse Co. .................................. -- -- 13,500 342,563 13,500 342,563
Summit Properties Inc. ..................... -- -- 15,000 296,250 15,000 296,250
Union du Credit Bail Immobilier Unibail .... -- -- 2,500 319,944 2,500 319,944
----------- ----------- -----------
909,590 1,540,678 2,450,268
----------- ----------- -----------
RECREATION & OTHER CONSUMER GOODS .1%
Yue Yuen Industrial (Holdings) Ltd. ........ -- -- 190,140 438,661 190,140 438,661
----------- ----------- -----------
See accompanying notes to pro forma combining financial statements.
73
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 9.7%
AT&T Corp. ................................. 181,500 $10,129,969 -- $ -- 181,500 $10,129,969
a Cable & Wireless Optus Ltd., 144A .......... 2,768,640 6,304,025 -- -- 2,768,640 6,304,025
Hong Kong Telecommunications Ltd. .......... 2,588,400 6,722,164 291,700 757,555 2,880,100 7,479,719
a Korea Telecom Corp., ADR ................... 97,400 3,896,000 -- -- 97,400 3,896,000
Nippon Telegraph & Telephone Corp. ......... 860 10,018,176 -- -- 860 10,018,176
PT Indosat, ADR ............................ 159,400 3,108,300 -- -- 159,400 3,108,300
a Rostelecom, ADR ............................ -- -- 25,300 248,256 25,300 248,256
Telecom Argentina Stet-France SA, ADR ...... -- -- 4,000 107,000 4,000 107,000
a Telecom Italia SpA, di Risp ................ 1,200,000 6,527,792 -- -- 1,200,000 6,527,792
Telefonica de Argentina SA, ADR ............ 315,000 9,883,125 -- -- 315,000 9,883,125
Telefonica de Argentina SA, B, ADR ......... 13,120 411,640 13,120 411,640
Telefonica del Peru SA, ADR ................ 131,800 1,993,475 -- -- 131,800 1,993,475
Telefonos de Mexico SA (Telmex), ADR ....... 142,800 11,540,025 -- -- 142,800 11,540,025
Telefonos de Mexico SA (Telmex), L, ADR .... -- -- 6,709 542,171 6,709 542,171
Telesp Celular Participacoes SA ............ 22,228,000 120,494 -- -- 22,228,000 120,494
Telesp Participacoes SA .................... 22,228,000 289,059 -- -- 22,228,000 289,059
----------- ----------- -----------
70,532,604 2,066,622 72,599,226
----------- ----------- -----------
TEXTILES & APPAREL .3%
a Fruit of the Loom Inc., A .................. 160,000 1,560,000 12,450 121,388 172,450 1,681,388
Yizheng Chemical Fibre Co. Ltd., H ......... -- -- 1,332,000 347,642 1,332,000 347,642
----------- ----------- -----------
1,560,000 469,030 2,029,030
----------- ----------- -----------
TRANSPORTATION 4.4%
Air New Zealand Ltd., B .................... 274,000 566,251 -- -- 274,000 566,251
British Airways PLC ........................ 1,808,900 12,502,800 71,020 490,878 1,879,920 12,993,678
a Fritz Cos. Inc. ............................ 350,000 3,762,500 -- -- 350,000 3,762,500
Mayne Nickless Ltd., A ..................... 1,730,400 5,921,477 -- -- 1,730,400 5,921,477
Peninsular & Oriental Steam
Navigation Co. .............................. 580,000 8,726,238 -- -- 580,000 8,726,238
Singapore Airlines Ltd., fgn ............... 102,000 970,573 102,000 970,573
----------- ----------- -----------
31,479,266 1,461,451 32,940,717
----------- ----------- -----------
UTILITIES ELECTRICAL & GAS 5.9%
Centrica PLC ............................... 2,880,000 6,775,322 -- -- 2,880,000 6,775,322
Endesa SA .................................. 122,000 2,601,794 -- -- 122,000 2,601,794
Endesa SA, ADR ............................. 88,000 1,870,000 -- -- 88,000 1,870,000
Gener SA, ADR .............................. 287,050 5,095,138 -- -- 287,050 5,095,138
Hong Kong Electric Holdings Ltd. ........... 2,001,500 6,449,087 130,000 418,877 2,131,500 6,867,964
Iberdrola SA, Br ........................... 85,000 1,294,679 -- -- 85,000 1,294,679
Korea Electric Power Corp. ................. 196,000 8,144,795 19,280 801,182 215,280 8,945,977
National Grid Group PLC .................... -- -- 79,730 554,536 79,730 554,536
Veba AG .................................... 173,800 10,251,995 -- -- 173,800 10,251,995
----------- ----------- -----------
42,482,810 1,774,595 44,257,405
----------- ----------- -----------
TOTAL COMMON STOCKS
(COST $465,856,909) ....................... 511,152,503 44,960,835 556,113,338
----------- ----------- -----------
PREFERRED STOCKS 4.3%
Banco Bradesco SA, pfd ..................... 767,000,000 3,938,944 121,758,350 625,293 888,758,350 4,564,237
Cia Energetica de Minas Gerais Cemig,
ADR, pfd .................................. -- -- 9,178 193,825 9,178 193,825
Cia Vale do Rio Doce, A, pfd ............... -- -- 13,400 266,088 13,400 266,088
Cia Vale do Rio Doce, A, ADR, pfd .......... 371,400 7,375,019 15,100 299,846 386,500 7,674,865
Coteminas Cia Tecidos Norte
de Minas, pfd ............................. -- -- 599,000 50,586 599,000 50,586
Embratel Participacoes SA, ADR, pfd ........ 121,000 1,678,875 -- -- 121,000 1,678,875
a Empresa Nacional de Comercio Redito
Participacoes, pfd ........................ -- -- 275,000 237 275,000 237
Moebel Walther AG, pfd ..................... 119,092 1,848,339 -- -- 119,092 1,848,339
News Corp. Ltd., pfd ....................... 850,000 6,475,708 -- -- 850,000 6,475,708
Petroleo Brasileiro SA, pfd ................ 36,000,000 5,649,073 -- -- 36,000,000 5,649,073
Telesp Celular Participacoes SA, pfd ....... 40,981,336 434,952 -- -- 40,981,336 434,952
See accompanying notes to pro forma combining financial statements.
74
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (CONT.)
Telesp Participacoes SA, ADR, pfd .......... 110,000 $ 2,516,250 110,000 $ 2,516,250
Telesp Participacoes SA, pfd ............... 40,981,336 970,457 40,981,336 970,457
----------- ----------- -----------
TOTAL PREFERRED STOCKS
(COST $37,947,109) ........................ 30,887,617 $ 1,435,875 32,323,492
----------- ----------- -----------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* AMOUNT* AMOUNT*
------------ ------------- ------------
BONDS 12.8%
Australian Government, 10.00%,
10/15/07 .................................. 4,184,000 AUD 3,435,239 4,184,000 AUD 3,435,239
Buoni Poliennali del Tesoro, 10.50%,
7/15/00 ................................... -- -- 581,013 EUR 643,626 581,013 EUR 643,626
Essar Steel Ltd., Reg S, FRN, 7.635%,
7/20/99 ................................... 445,000 300,375 -- -- 445,000 300,375
Fannie Mae, 5.25%, 1/15/09 ................. -- -- 495,000 452,862 495,000 452,862
Federal Republic of Germany,
Series 118, 5.25%, 2/21/01 .................. 710,696 EUR 756,986 613,550 EUR 653,513 1,324,246 EUR 1,410,499
Government of Australia, 10.00%,
10/15/07 .................................... -- -- 988,000 AUD 811,189 988,000 AUD 811,189
Government of Canada:
7.00%, 12/01/06 ............................ 1,140,000 CAD 849,528 470,000 CAD 350,244 1,610,000 CAD 1,199,772
6.00%, 6/01/08 ............................. 2,812,000 CAD 1,990,881 -- -- 2,812,000 CAD 1,990,881
Government of France, 6.50%,
10/25/06 .................................. 6,309,000 EUR 7,410,489 -- -- 6,309,000 EUR 7,410,489
Government of Italy:
cvt., 5.00%, 6/28/01 ....................... -- -- 640,000 1,056,000 640,000 1,056,000
7.75%, 11/01/06 ............................ 5,685,153 EUR 7,037,113 723,038 EUR 894,981 6,408,191 EUR 7,932,094
Government of Netherlands, 5.75%,
2/15/07 ................................... 3,484,000 EUR 3,895,383 -- -- 3,484,000 EUR 3,895,383
Government of New Zealand, 7.00%,
7/15/09 ................................... 3,614,000 NZD 1,983,362 540,000 NZD 296,352 4,154,000 NZD 2,279,714
Government of Spain, 7.35%, 3/31/07 ........ 3,201,000 EUR 3,891,078 -- -- 3,201,000 EUR 3,891,078
Hypothekenbank In Essen AG, Series 502,
5.25%, 1/22/08 ............................ 4,834,265 EUR 5,145,847 1,242,439 EUR 1,322,518 6,076,704 EUR 6,468,365
Kingdom of Belgium, 6.25%, 3/28/07 ......... 3,968,208 EUR 4,539,070 677,989 EUR 775,524 4,646,197 EUR 5,314,594
Kingdom of Denmark, 7.00%, 11/15/07 ........ 17,701,000 DKK 2,838,633 2,867,000 DKK 459,768 20,568,000 DKK 3,298,401
Kingdom of Sweden, 6.00%, 2/09/05 .......... 22,400,000 SEK 2,802,898 5,500,000 SEK 688,212 27,900,000 SEK 3,491,110
Protexa Construcciones SA de CV,
144A, 12.125%, 7/24/02 .................... -- -- 100,000 80,500 100,000 80,500
PT Indah Kiat Finance Mauritius Ltd.,
10.00%, 7/01/07 ........................... -- -- 300,000 204,000 300,000 204,000
Republic of Argentina:
10.95%, 11/01/99 ........................... 1,025,000 1,035,250 1,025,000 1,035,250
Reg S, 11.75%, 2/12/07 ..................... -- -- 100,000 ARS 80,383 100,000 ARS 80,383
Republic of Ecuador:
Reg S, 11.25%, 4/25/02 ..................... -- -- 450,000 280,125 450,000 280,125
144A, 11.25%, 4/25/02 ...................... -- -- 275,000 171,188 275,000 171,188
Republic of Panama, 8.875%, 9/30/27 ........ 960,000 796,800 -- -- 960,000 796,800
Republic of Peru, FRN, 4.50%, 3/07/17 ...... 1,560,000 962,333 -- -- 1,560,000 962,333
Republic of Turkey, 12.375%, 6/15/09 ....... 1,130,000 1,121,525 35,000 34,738 1,165,000 1,156,263
Republic of Venezuela:
144A, 9.125%, 6/18/07 ...................... 1,540,000 1,170,400 100,000 76,000 1,640,000 1,246,400
Reg S, 9.125%, 6/18/07 ..................... -- -- 600,000 456,000 600,000 456,000
SEI Holdings IX Inc., 144A, 11.00%,
11/30/00 .................................. -- -- 170,000 176,800 170,000 176,800
Treuhandanstalt, 7.50%, 9/09/04 ............ 511,292 EUR 610,682 -- -- 511,292 610,682
U.S. Treasury Notes:
8.50%, 2/15/00 ............................. -- -- 880,000 898,150 880,000 898,150
6.25%, 8/31/00 ............................. -- -- 1,010,000 1,019,469 1,010,000 1,019,469
4.50%, 1/31/01 ............................. 5,890,000 5,803,494 2,000,000 1,970,626 7,890,000 7,774,120
7.25%, 8/15/04 ............................. -- -- 576,000 612,000 576,000 612,000
5.25%, 11/15/28 ............................ 5,000,000 4,426,565 2,000,000 1,770,626 7,000,000 6,197,191
See accompanying notes to pro forma combining financial statements.
75
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
PRO FORMA COMBINING STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION FUND GLOBAL ASSET ALLOCATION FUND PRO FORMA COMBINED
-------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
United Kingdom:
6.50%, 12/07/03 ............................ -- $ -- 880,000 GBP $1,476,284 880,000 GBP$1,476,284
7.50%, 12/07/06 ............................ 3,685,000 GBP 6,549,033 280,000 GBP 497,620 3,965,000 GBP 7,046,653
United Mexican States:
9.75%, 2/06/01 ............................. 2,895,000 3,017,314 620,000 646,195 3,515,000 3,663,509
11.375%, 9/15/16 ........................... -- -- 430,000 462,465 430,000 462,465
6.25%, 12/31/19 ............................ 5,050,000 3,743,313 5,050,000 3,743,313
11.50%, 5/15/26 ............................ -- -- 220,000 245,843 220,000 245,843
----------- ------------ -----------
TOTAL BONDS (COST $118,784,832) ............ 76,113,591 19,563,801 95,677,392
----------- ------------ -----------
SHORT TERM INVESTMENTS 6.6%
Chase Securities Inc., 5.00%, 6/30/99,
Time Deposit .............................. 19,226,000 19,226,000 19,226,000 19,226,000
Fannie Mae, 4.85%, 7/19/99 ................. 10,000,000 9,975,950 10,000,000 9,975,950
Sallie Mae, 4.85%, 7/19/99 ................. 10,000,000 10,000,000 10,000,000 10,000,000
U.S. Treasury Bills, 4.48% to 4.72% with
maturities to 10/21/99 .................... 10,195,000 10,114,323 10,195,000 10,114,323
----------- ------------ -----------
TOTAL SHORT TERM INVESTMENTS
(COST $30,085,569) ........................ 49,316,273 -- 49,316,273
----------- ------------ -----------
TOTAL INVESTMENTS BEFORE REPURCHASE
AGREEMENTS (COST $652,674,419) ............ 667,469,984 65,960,511 733,430,495
----------- ------------ -----------
g REPURCHASE AGREEMENTS .6%
CIBC Oppenheimer Corp., 4.80%, 7/01/99
(Maturity Value $2,100,280)
Collateralized by U.S. Treasury Notes
and Bonds ................................. -- -- 2,100,000 2,100,000 2,100,000 2,100,000
Deutsche Bank AG, 4.75%, 7/01/99
(Maturity Value $2,120,280)
Collateralized by U.S. Treasury Notes
and Bonds ................................. -- -- 2,120,000 2,120,000 2,120,000 2,120,000
----------- ------------ -----------
TOTAL REPURCHASE AGREEMENTS
(COST $4,220,000) ......................... -- 4,220,000 4,220,000
----------- ------------ -----------
TOTAL INVESTMENTS
(COST $656,894,419) 98.8% ................. 667,469,984 70,180,511 737,650,495
NET EQUITY IN FORWARD CONTRACTS ............ 21,151 5,130 26,281
OTHER ASSETS, LESS LIABILITIES 1.2% ........ 8,890,544 410,604 9,301,148
----------- ------------ -----------
TOTAL NET ASSETS 100.0% .................... $676,381,679 $ 70,596,245 $746,977,924
=========== ============ ============
</TABLE>
Currency Abbreviations:
ARS - Argentine Peso
AUD - Australian Dollar
AD - Canadian Dollar
DKK - Danish Krone
EUR - European Unit
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krone
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
See accompanying notes to pro forma combining financial statements.
76
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION GLOBAL ASSET PRO FORMA
FUND ALLOCATION FUND COMBINED
-------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .............................................................. $588,682,040 $63,992,379 $652,674,419
-------------------------------------------------------
Value ............................................................. 667,469,984 65,960,511 733,430,495
Repurchase Agreements, at value and cost ......................... -- 4,220,000 4,220,000
Cash ............................................................. 1,703,578 561 1,704,139
Receivables:
Investment securities sold ........................................ 3,339,306 -- 3,339,306
Capital shares sold ............................................... 137,846 50 137,896
Dividends and interest ............................................ 4,788,533 533,811 5,322,344
Unrealized gain on forward exchange contracts .................... 21,151 5,130 26,281
-------------------------------------------------------
Total assets ...................................................... 677,460,398 70,720,063 748,180,461
-------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................................... -- 24,462 24,462
Capital shares redeemed ........................................... 401,778 46,386 448,164
Affiliates ........................................................ 390,348 -- 390,348
Deffered tax liability ........................................... 36,995 -- 36,995
Other liabilities ................................................ 249,598 52,970 302,568
-------------------------------------------------------
Total liabilities ................................................. 1,078,719 123,818 1,202,537
-------------------------------------------------------
Net assets, at value ............................................. $676,381,679 $70,596,245 $746,977,924
=======================================================
CLASS 1:
Net assets, at value ............................................. $660,891,561 $70,553,184 $731,444,745
=======================================================
Shares outstanding** ............................................. 31,309,340 5,297,517 54,914,001
=======================================================
Net asset value and offering price per share ..................... $ 21.11 $ 13.32 $ 13.32
=======================================================
CLASS 2:
Net assets, at value ............................................. $ 15,490,118 $ 43,061 $ 15,533,179
=======================================================
Shares outstanding** ............................................. 735,922 3,239 1,168,786
=======================================================
Net asset value and offering price per share ..................... $ 21.05 $ 13.29 $ 13.29
=======================================================
</TABLE>
** See note 2 in the accompanying notes to pro forma combining financial
statements.
See accompanying notes to pro forma combining financial statements.
77
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION GLOBAL ASSET PRO FORMA PRO FORMA
FUND ALLOCATION FUND ADJUSTMENTS COMBINED
----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ............................................................ $ 9,590,810 $ 830,102 $ 10,420,912
Interest ............................................................. 2,307,725 831,921 3,139,646
----------------------------------------------------------
Total investment income ............................................... 11,898,535 1,662,023 -- 13,560,558
----------------------------------------------------------
Expenses:
Management fees ...................................................... 2,051,486 237,031 (23,704)a 2,264,813
Administrative fees .................................................. 328,996 54,699 128,803 b 512,498
Distribution fees - Class 2 .......................................... 18,750 30 (9)c 18,771
Custodian fees ....................................................... 103,500 -- 103,500
Reports to shareholders .............................................. -- 7,200 7,200
Professional fees .................................................... 20,900 1,900 22,800
Other ................................................................ 1,192 379 1,571
----------------------------------------------------------
Total expenses ........................................................ 2,524,824 301,239 105,090 2,931,153
----------------------------------------------------------
Net investment income ................................................. 9,373,711 1,360,784 (105,090) 10,629,405
----------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 68,059,983 (1,148,042) 66,911,941
Foreign currency transactions ......................................... (511,527) (32,423) (543,950)
----------------------------------------------------------
Net realized gain (loss) .............................................. 67,548,456 (1,180,465) -- 66,367,991
Net unrealized appreciation (depreciation) on:
Investments ........................................................... (5,777,410) 3,153,775 (2,623,635)
Deferred taxes ........................................................ (36,995) -- (36,995)
Translation of assets and liabilities denominated in foreign currencies (17,098) (5,174) (22,272)
----------------------------------------------------------
Net unrealized gain (loss) ............................................ (5,831,503) 3,148,601 (2,682,902)
----------------------------------------------------------
Net realized and unrealized gain ...................................... 61,716,953 1,968,136 -- 63,685,089
----------------------------------------------------------
Net increase in net assets resulting from operations .................. $ 71,090,664 $ 3,328,920 $ (105,090) $74,314,494
==========================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule. The
combined entity will appoint a new advisor, Templeton Global Advisor
Limited will adopt the following management fee structure.
Mgmt
First $200,000,000 0.75%
Next $1,100,000,000 0.675%
Over $1,300,000,000 0.600%
b Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt the following administrative fee structure.
Admin
First $200,000,000 0.150%
Next $500,000,000 0.135%
Next $500,000,000 0.100%
Over $1,200,000,000 0.075%
c Pro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate
reflected in the Pro Forma Combined is 0.25% of the average net assets.
+ Net of foreign taxes of $896,270 and $81,106 for TVPSF Templeton Asset
Allocation Fund and FVF Templeton Global Asset Allocation Fund,
respectively.
See accompanying notes to pro forma combining financial statements.
78
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VIP TEMPLETON
GLOBAL ASSET
TVP TEMPLETON VIP TEMPLETON ALLOCATION FUND
ASSET ALLOCATION GLOBAL ASSET PRO FORMA PRO FORMA
FUND ALLOCATION FUND ADJUSTMENTS COMBINED
---------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ........................................................... $ 16,501,479 $ 2,000,965 $ -- $ 18,502,444
Interest ............................................................ 10,800,065 2,647,941 -- 13,448,006
---------------------------------------------------------
Total investment income ........................................ 27,301,544 4,648,906 -- 31,950,450
---------------------------------------------------------
Expenses:
Management fees ..................................................... 4,500,289 585,747 (58,575)a 5,027,461
Administrative fees ................................................. 715,727 135,172 261,274 b 1,112,173
Distribution fees - Class 2 ......................................... 32,593 -- -- 32,593
Transfer agent fees ................................................. -- -- -- --
Custodian fees ...................................................... 330,000 22,000 -- 352,000
Reports to shareholders ............................................. 201,000 10,200 -- 211,200
Registration and filing fees ........................................ -- -- -- --
Professional fees ................................................... 36,900 4,200 -- 41,100
Trustees' fees and expenses ......................................... 19,000 700 -- 19,700
Other ............................................................... 10,552 654 -- 11,206
---------------------------------------------------------
Total expenses ................................................. 5,846,061 758,673 202,699 6,807,433
Expenses waived/paid by affiliate .............................. -- -- -- --
---------------------------------------------------------
Net expenses .................................................. 5,846,061 758,673 202,699 6,807,433
---------------------------------------------------------
Net investment income (loss) ................................. 21,455,483 3,890,233 202,699 25,143,017
---------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................ 82,526,902 3,090,420 -- 85,617,322
Foreign currency transactions ...................................... (3,778,566) (372,191) -- (4,150,757)
---------------------------------------------------------
Net realized gain ............................................. 78,748,336 2,718,229 -- 81,466,565
Net unrealized appreciation (depreciation) on:
Investments ......................................................... (55,891,009) (7,245,483) -- (63,136,492)
Deferred taxes ...................................................... -- -- -- --
Translation of assets and liabilities denominated
in foreign currencies .............................................. (649,958) (100,044) -- (750,002)
---------------------------------------------------------
Net unrealized gain ........................................... (56,540,967) (7,345,527) -- (63,886,494)
---------------------------------------------------------
Net realized and unrealized gain ..................................... 22,207,369 (4,627,298) -- 17,580,071
---------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ...... $ 43,662,852 $ (737,065) $202,699 $ 42,723,088
=========================================================
</TABLE>
a Pro Forma adjustment for difference in Management fee schedule. The
combined entity will appoint a new advisor, Templeton Global Advisor
Limited and will adopt the following fee structure.
Mgmt
First $ 200,000,000 0.750%
Next $1,100,000,000 0.675%
Over $1,300,000,000 0.600%
b Pro Forma adjustment for difference in Administrative fee schedule. The
combined entity will adopt the following management fee structure.
Admin
First $ 200,000,000 0.150%
Next $ 500,000,000 0.135%
Next $ 500,000,000 0.100%
Over $1,200,000,000 0.0750%
+ Net of foreign taxes of $1,825,334 and $183,011 for TVP Templeton Asset
Allocation Fund and VIP Templeton Global Asset Allocation Fund,
respectively.
See accompanying notes to pro forma combining financial statements.
79
<PAGE>
TVP TEMPLETON ASSET ALLOCATION FUND
VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization (the
"Agreement and Plan") by the shareholders of the Templeton Variable Products
Series Fund Templeton International Fund("TVP Templeton International Fund"),
the Franklin Templeton Variable Insurance Products Trust Templeton International
Equity Fund ("VIP Templeton International Equity Fund") will acquire all the net
assets of the TVP Templeton International Class 1 and 2 in exchange for the
Classes 1 and 2 shares, respectively, shares of VIP Templeton International
Equity Fund. The merger will be accounted for by the method of accounting for
tax free business combinations of investment companies and TVP Templeton
International will be the accounting survivor. The pro forma combining Statement
of Assets and Liabilities reflects the financial position of TVP Templeton
International June 30, 1999 as though the merger occurred as of that date. The
pro forma combining Statement of Operations reflects the results of operations
of the TVP Templeton International and VIP Templeton International Equity for
the period Jan uary 1, 1999 to June 30, 1999 as though the merger occurred on
Jan uary 1, 1999. The pro forma financial statements do not reflect the expenses
of either fund in carrying out its obligations under the Agreement and Plan of
Reorganization or any adjustment with respect to additional distributions that
may be made prior to reorganization. The pro forma financial statements are
presented for the information of the reader, and should be read in conjunction
with the historical financial statements of the funds.
2. CAPITAL SHARES:
The number of Class 1 and 2 shares issued was calculated by dividing the Class 1
and 2 net assets of the TVP Templeton International at June 30, 1999 by the
Class 1 and 2 net asset value per share of the VIP Templeton International
Equity, respectively at June 30, 1999.
80
Dear Policy Owner:
It is a pleasure to bring you the annual report for Allianz ValueLife, a
variable universal life product, and the Franklin Valuemark Funds for the period
ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Allianz ValueLife. This rating confirms the company's
financial soundness and its ability to meet its obligations to policy holders
like you. Allianz Life has also received excellent ratings from A.M. Best,
Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Allianz ValueLife will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
/s/ Lowell C. Anderson
Sincerely,
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
ALLIANZ VALUELIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Utilities Securities** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 15-YEAR SURRENDER
CHARGES (EQUAL TO THE DEFERRED ADMINISTRATIVE CHARGE PLUS THE DEFERRED SALES
LOAD) AND THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM
PREMIUM PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON
POLICY ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY
PROSPECTUS FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE
SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Templeton(R)
Valuemark(R) Income Plus (VIP), an immediate variable annuity, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues VIP. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life has also received excellent ratings from A.M. Best, Moody's and
Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. We encourage you to take note of
the portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Templeton Valuemark
Income Plus will continue to be an appropriate vehicle for investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) IV,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark IV. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark IV will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK IV
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
PREFERRED
LIFE
ALLIANZ LIFE SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------------
UNIT PRICE SINCE INCEPTION SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE INCEPTION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Growth $15.54 +12.41% -- +16.39% 05/01/96 +16.15% 06/10/96
Global Health Care
Securities(1) $10.60 -- -- -0.06% 05/01/98 +7.33% 08/17/98
Global Utilities
Securities(2) $28.08 +3.44% +9.69% +10.89% 01/24/89 +10.77% 09/06/91
Growth & Income $25.99 +0.63% +13.31% +10.02% 01/24/89 +12.33% 09/06/91
High Income $21.02 -6.67% +6.24% +7.69% 01/24/89 +9.14% 09/06/91
Income Securities $24.90 -5.96% +6.50% +9.55% 01/24/89 +9.45% 09/06/91
Money Market(1) $14.26 -2.44% +2.79% +3.55% 01/24/89 +2.76% 09/06/91
Mutual Discovery
Securities $11.20 -12.50% -- +3.05% 11/08/96 +2.52% 12/02/96
Mutual Shares Securities $11.81 -7.49% -- +5.75% 11/08/96 +5.35% 12/02/96
Natural Resources
Securities $ 8.43 -32.58% -11.34% -1.79% 01/24/89 -2.93% 09/06/91
Real Estate Securities $22.90 -24.15% +7.82% +8.62% 01/24/89 +10.79% 09/06/91
Rising Dividends $21.03 -0.76% +14.86% +11.11% 01/27/92 +11.33% 03/10/92
Small Cap $14.56 -8.54% -- +11.44% 11/01/95 +4.15% 06/10/96
Templeton Developing
Markets Equity $ 7.96 -28.87% -- -5.62% 03/15/94 -5.72% 04/25/94
Templeton Global Asset
Allocation $13.54 -7.62% -- +7.59% 05/01/95 +7.15% 08/04/95
Templeton Global Growth $16.24 +1.26% -- +10.06% 03/15/94 +10.35% 04/25/94
Templeton Global Income
Securities $17.75 -0.60% +3.32% +5.87% 01/24/89 +5.08% 09/06/91
Templeton International
Equity $18.32 -2.10% +7.88% +8.90% 01/27/92 +9.08% 03/10/92
Templeton International
Smaller Companies $ 9.34 -19.67% -- -4.65% 05/01/96 -5.53% 06/10/96
Templeton Pacific Growth $ 8.03 -20.52% -12.01% -3.51% 01/27/92 -3.55% 03/10/92
U.S. Government Securities $18.85 -0.25% +4.53% +6.60% 03/14/89 +6.26% 09/06/91
Value Securities(1) $ 7.71 -- -- -28.97% 05/01/98 -8.66% 08/17/98
Zero Coupon - 2000(1) $20.50 -0.19% +3.58% +7.53% 03/14/89 +7.21% 09/06/91
Zero Coupon - 2005(1) $24.79 +4.77% +6.01% +9.63% 03/14/89 +9.91% 09/06/91
Zero Coupon - 2010(1) $27.67 +6.65% +8.32% +10.87% 03/14/89 +12.03% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Figures are based on subaccount performance;
Franklin Valuemark IV was first available February 3, 1997. Performance reflects
all charges, including the annual contract maintenance charge and applicable
contingent deferred sales charges (CDSC). The CDSC reduces from 6% to 0% over
seven full years for each purchase payment and is adjusted for the applicable
free withdrawal privilege. Averaged returns smooth out variations in a
subaccount's returns, which can be significant; they are not the same as
year-by-year results. Results for less than one year are aggregate total return.
Results are based on past performance of the subaccounts of Allianz Life
Insurance Company of North America ("Allianz Life") and its subsidiary Preferred
Life Insurance Company of New York ("Preferred Life"). The Allianz Life and
Preferred Life subaccounts are identical except for subaccount inception dates.
Investment returns and the value of your principal will vary with market
conditions, so you may have a gain or loss when you sell your units. PAST
PERFORMANCE CANNOT PREDICT OR GUARANTEE FUTURE RESULTS. Since 1982, it has been
a period of generally rising securities prices, which may not be sustained in
the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
III, a flexible-premium deferred variable annuity, and the Franklin Valuemark
Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark III. This rating confirms the company's
financial soundness and its ability to meet its obligations to contract holders
like you. Allianz Life has also received excellent ratings from A.M. Best,
Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows standardized average annual total returns
and each portfolio's unit price for the year ended December 31, 1998. We
encourage you to take note of the portfolios' long-term performance illustrated
by the graph accompanying each portfolio summary within this book. The graph
shows how a $10,000 hypothetical investment would have grown since the
portfolio's inception through December 31, 1998. It is important to remember
that financial markets fluctuate daily, and past investment conditions and
results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark III will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK III
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
SUBACCOUNT
INCEPTION SINCE UNIT PRICE
SUBACCOUNT NAME DATE 1-YEAR 5-YEAR INCEPTION ON 12/31/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth 05/01/96 +13.42% -- +17.33% $15.57
Global Health Care Securities(1) 05/01/98 -- -- +0.90% $10.61
Global Utilities Securities(2) 01/24/89 +4.44% +10.18% +10.98% $28.31
Growth & Income 01/24/89 +1.63% +13.78% +10.11% $26.23
High Income 01/24/89 -5.68% +6.81% +7.78% $21.21
Income Securities 01/24/89 -4.97% +7.07% +9.65% $25.12
Money Market(1) 01/24/89 -1.44% +3.42% +3.64% $14.39
Mutual Discovery Securities 11/08/96 -11.52% -- +4.44% $11.23
Mutual Shares Securities 11/08/96 -6.50% -- +7.11% $11.84
Natural Resources Securities 01/24/89 -31.62% -10.30% -1.70% $ 8.51
Real Estate Securities 01/24/89 -23.17% +8.36% +8.72% $23.11
Rising Dividends 01/27/92 +0.24% +15.31% +11.34% $21.17
Small Cap 11/01/95 -7.56% -- +12.30% $14.60
Templeton Developing Markets Equity 03/15/94 -27.90% -- -4.76% $ 7.99
Templeton Global Asset Allocation 05/01/95 -6.63% -- +8.36% $13.59
Templeton Global Growth 03/15/94 +2.26% -- +10.59% $16.31
Templeton Global Income Securities 01/24/89 +0.39% +3.94% +5.96% $17.91
Templeton International Equity 01/27/92 -1.11% +8.42% +9.15% $18.44
Templeton International Smaller
Companies 05/01/96 -18.69% -- -3.40% $ 9.36
Templeton Pacific Growth 01/27/92 -19.54% -10.94% -3.12% $ 8.08
U.S. Government Securities 03/14/89 +0.75% +5.13% +6.70% $19.01
Value Securities(1) 05/01/98 -- -- -28.03% $ 7.72
Zero Coupon - 2000(1) 03/14/89 +0.81% +4.19% +7.63% $20.68
Zero Coupon - 2005(1) 03/14/89 +5.77% +6.58% +9.73% $25.00
Zero Coupon - 2010(1) 03/14/89 +7.66% +8.86% +10.98% $27.92
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Figures are based on subaccount performance;
Franklin Valuemark III was first available January 1, 1994. Performance reflects
all charges, including the annual contract maintenance charge and applicable
contingent deferred sales charges (CDSC). The CDSC reduces from 6% to 0% over
five full years for each purchase payment and is adjusted for the applicable
free withdrawal privilege. Averaged returns smooth out variations in a
subaccount's returns, which can be significant; they are not the same as
year-by-year results. Results for less than one year are aggregate total return.
Results are based on past performance of the subaccounts. Investment returns and
the value of your principal will vary with market conditions, so you may have a
gain or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) II,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark II. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark II will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK II
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
ALLIANZ LIFE SUBACCOUNT
UNIT PRICE SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth $15.57 +14.27% -- +17.33% 05/01/96
Global Health Care Securities(1) $10.61 -- -- +1.75% 05/01/98
Global Utilities Securities(2) $28.31 +5.29% +10.18% +10.98% 01/24/89
Growth & Income $26.23 +2.48% +13.78% +10.11% 01/24/89
High Income $21.21 -4.83% +6.81% +7.78% 01/24/89
Income Securities $25.12 -4.12% +7.07% +9.65% 01/24/89
Money Market(1) $14.39 -0.59% +3.42% +3.64% 01/24/89
Mutual Discovery Securities $11.23 -10.67% -- +4.44% 11/08/96
Mutual Shares Securities $11.84 -5.65% -- +7.11% 11/08/96
Natural Resources Securities $ 8.51 -30.77% -10.30% -1.70% 01/24/89
Real Estate Securities $23.11 -22.32% +8.36% +8.72% 01/24/89
Rising Dividends $21.17 +1.09% +15.31% +11.34% 01/27/92
Small Cap $14.60 -6.71% -- +12.30% 11/01/95
Templeton Developing Markets Equity $ 7.99 -27.05% -- -4.76% 03/15/94
Templeton Global Asset Allocation $13.59 -5.78% -- +8.36% 05/01/95
Templeton Global Growth $16.31 +3.11% -- +10.59% 03/15/94
Templeton Global Income Securities $17.91 +1.24% +3.94% +5.96% 01/24/89
Templeton International Equity $18.44 -0.26% +8.42% +9.15% 01/27/92
Templeton International Smaller
Companies $ 9.36 -17.84% -- -3.40% 05/01/96
Templeton Pacific Growth $ 8.08 -18.69% -10.94% -3.12% 01/27/92
U.S. Government Securities $19.01 +1.60% +5.13% +6.70% 03/14/89
Value Securities(1) $ 7.72 -- -- -27.18% 05/01/98
Zero Coupon - 2000(1) $20.68 +1.66% +4.19% +7.63% 03/14/89
Zero Coupon - 2005(1) $25.00 +6.62% +6.58% +9.73% 03/14/89
Zero Coupon - 2010(1) $27.92 +8.51% +8.86% +10.98% 03/14/89
</TABLE>
<TABLE>
<CAPTION>
PREFERRED LIFE
SUBACCOUNT
SINCE INCEPTION
SUBACCOUNT NAME INCEPTION DATE
- ---------------------------------------------------------------------
<S> <C> <C>
Capital Growth +17.15% 06/10/96
Global Health Care Securities(1) +9.11% 08/17/98
Global Utilities Securities(2) +10.86% 09/06/91
Growth & Income +12.43% 09/06/91
High Income +9.24% 09/06/91
Income Securities +9.55% 09/06/91
Money Market(1) -2.85% 09/06/91
Mutual Discovery Securities +3.96% 12/02/96
Mutual Shares Securities +6.75% 12/02/96
Natural Resources Securities -2.85% 09/06/91
Real Estate Securities +10.89% 09/06/91
Rising Dividends +11.56% 03/10/92
Small Cap +5.30% 06/10/96
Templeton Developing Markets Equity -4.85% 04/25/94
Templeton Global Asset Allocation +8.00% 08/04/95
Templeton Global Growth +10.89% 04/25/94
Templeton Global Income Securities +5.17% 09/06/91
Templeton International Equity +9.32% 03/10/92
Templeton International Smaller
Companies -4.21% 06/10/96
Templeton Pacific Growth -3.16% 03/10/92
U.S. Government Securities +6.36% 09/06/91
Value Securities(1) -6.87% 08/17/98
Zero Coupon - 2000(1) +7.31% 09/06/91
Zero Coupon - 2005(1) +10.01% 09/06/91
Zero Coupon - 2010(1) +12.13% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Performance reflects all charges, including the
annual contract maintenance charge and applicable contingent deferred sales
charges (CDSC). The CDSC reduces from 5% to 0% over five full years for each
purchase payment and is adjusted for the applicable free withdrawal privilege.
Averaged returns smooth out variations in a subaccount's returns, which can be
significant; they are not the same as year-by-year results. Results for less
than one year are aggregate total return. Results are based on past performance
of the subaccounts of Allianz Life Insurance Company of North America ("Allianz
Life") and its subsidiary Preferred Life Insurance Company of New York
("Preferred Life"). The Allianz Life and Preferred Life subaccounts are
identical except for subaccount inception dates. Investment returns and the
value of your principal will vary with market conditions, so you may have a gain
or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR GUARANTEE
FUTURE RESULTS. Since 1982, it has been a period of generally rising securities
prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Policy Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
Life, a single-premium variable life insurance product, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark Life. This rating confirms the
company's financial soundness and its ability to meet its obligations to policy
holders like you. Allianz Life has also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark Life will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning, and other financial and insurance needs.
As always, we thank you for your continued support and look forward to serving
you in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK LIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Growth $13.27 $15.85 +19.39%
Global Health Care Securities** $10.00 $10.66 +6.60%
Global Utilities Securities*** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Discovery Securities $12.07 $11.38 -5.71%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton International Smaller Companies $10.94 $ 9.53 -12.93%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
Value Securities** $10.00 $ 7.75 -22.50%
Zero Coupon - 2000 $25.39 $27.09 +6.70%
Zero Coupon - 2005 $29.72 $33.20 +11.69%
Zero Coupon - 2010 $34.63 $39.34 +13.59%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 10-YEAR DEFERRED
ISSUE CHARGE (COVERING PREMIUM TAXES, SALES CHARGES AND POLICY ISSUE CHARGE) AND
THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM PREMIUM
PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON POLICY
ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**The subaccount began operations May 1, 1998, so figures reflect the change in
unit price from May 1, 1998, to December 31, 1998, rather than from the
reporting period of December 31, 1997, to December 31, 1998. In addition,
expense reductions by the investment managers increased returns; these
arrangements have been terminated.
***Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) II,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark II. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark II will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK II
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
ALLIANZ LIFE SUBACCOUNT
UNIT PRICE SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth $15.57 +14.27% -- +17.33% 05/01/96
Global Health Care Securities(1) $10.61 -- -- +1.75% 05/01/98
Global Utilities Securities(2) $28.31 +5.29% +10.18% +10.98% 01/24/89
Growth & Income $26.23 +2.48% +13.78% +10.11% 01/24/89
High Income $21.21 -4.83% +6.81% +7.78% 01/24/89
Income Securities $25.12 -4.12% +7.07% +9.65% 01/24/89
Money Market(1) $14.39 -0.59% +3.42% +3.64% 01/24/89
Mutual Discovery Securities $11.23 -10.67% -- +4.44% 11/08/96
Mutual Shares Securities $11.84 -5.65% -- +7.11% 11/08/96
Natural Resources Securities $ 8.51 -30.77% -10.30% -1.70% 01/24/89
Real Estate Securities $23.11 -22.32% +8.36% +8.72% 01/24/89
Rising Dividends $21.17 +1.09% +15.31% +11.34% 01/27/92
Small Cap $14.60 -6.71% -- +12.30% 11/01/95
Templeton Developing Markets Equity $ 7.99 -27.05% -- -4.76% 03/15/94
Templeton Global Asset Allocation $13.59 -5.78% -- +8.36% 05/01/95
Templeton Global Growth $16.31 +3.11% -- +10.59% 03/15/94
Templeton Global Income Securities $17.91 +1.24% +3.94% +5.96% 01/24/89
Templeton International Equity $18.44 -0.26% +8.42% +9.15% 01/27/92
Templeton International Smaller
Companies $ 9.36 -17.84% -- -3.40% 05/01/96
Templeton Pacific Growth $ 8.08 -18.69% -10.94% -3.12% 01/27/92
U.S. Government Securities $19.01 +1.60% +5.13% +6.70% 03/14/89
Value Securities(1) $ 7.72 -- -- -27.18% 05/01/98
Zero Coupon - 2000(1) $20.68 +1.66% +4.19% +7.63% 03/14/89
Zero Coupon - 2005(1) $25.00 +6.62% +6.58% +9.73% 03/14/89
Zero Coupon - 2010(1) $27.92 +8.51% +8.86% +10.98% 03/14/89
</TABLE>
<TABLE>
<CAPTION>
PREFERRED LIFE
SUBACCOUNT
SINCE INCEPTION
SUBACCOUNT NAME INCEPTION DATE
- ---------------------------------------------------------------------
<S> <C> <C>
Capital Growth +17.15% 06/10/96
Global Health Care Securities(1) +9.11% 08/17/98
Global Utilities Securities(2) +10.86% 09/06/91
Growth & Income +12.43% 09/06/91
High Income +9.24% 09/06/91
Income Securities +9.55% 09/06/91
Money Market(1) -2.85% 09/06/91
Mutual Discovery Securities +3.96% 12/02/96
Mutual Shares Securities +6.75% 12/02/96
Natural Resources Securities -2.85% 09/06/91
Real Estate Securities +10.89% 09/06/91
Rising Dividends +11.56% 03/10/92
Small Cap +5.30% 06/10/96
Templeton Developing Markets Equity -4.85% 04/25/94
Templeton Global Asset Allocation +8.00% 08/04/95
Templeton Global Growth +10.89% 04/25/94
Templeton Global Income Securities +5.17% 09/06/91
Templeton International Equity +9.32% 03/10/92
Templeton International Smaller
Companies -4.21% 06/10/96
Templeton Pacific Growth -3.16% 03/10/92
U.S. Government Securities +6.36% 09/06/91
Value Securities(1) -6.87% 08/17/98
Zero Coupon - 2000(1) +7.31% 09/06/91
Zero Coupon - 2005(1) +10.01% 09/06/91
Zero Coupon - 2010(1) +12.13% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Performance reflects all charges, including the
annual contract maintenance charge and applicable contingent deferred sales
charges (CDSC). The CDSC reduces from 5% to 0% over five full years for each
purchase payment and is adjusted for the applicable free withdrawal privilege.
Averaged returns smooth out variations in a subaccount's returns, which can be
significant; they are not the same as year-by-year results. Results for less
than one year are aggregate total return. Results are based on past performance
of the subaccounts of Allianz Life Insurance Company of North America ("Allianz
Life") and its subsidiary Preferred Life Insurance Company of New York
("Preferred Life"). The Allianz Life and Preferred Life subaccounts are
identical except for subaccount inception dates. Investment returns and the
value of your principal will vary with market conditions, so you may have a gain
or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR GUARANTEE
FUTURE RESULTS. Since 1982, it has been a period of generally rising securities
prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Policy Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
Life, a single-premium variable life insurance product, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark Life. This rating confirms the
company's financial soundness and its ability to meet its obligations to policy
holders like you. Allianz Life has also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark Life will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning, and other financial and insurance needs.
As always, we thank you for your continued support and look forward to serving
you in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK LIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Growth $13.27 $15.85 +19.39%
Global Health Care Securities** $10.00 $10.66 +6.60%
Global Utilities Securities*** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Discovery Securities $12.07 $11.38 -5.71%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton International Smaller Companies $10.94 $ 9.53 -12.93%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
Value Securities** $10.00 $ 7.75 -22.50%
Zero Coupon - 2000 $25.39 $27.09 +6.70%
Zero Coupon - 2005 $29.72 $33.20 +11.69%
Zero Coupon - 2010 $34.63 $39.34 +13.59%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 10-YEAR DEFERRED
ISSUE CHARGE (COVERING PREMIUM TAXES, SALES CHARGES AND POLICY ISSUE CHARGE) AND
THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM PREMIUM
PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON POLICY
ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**The subaccount began operations May 1, 1998, so figures reflect the change in
unit price from May 1, 1998, to December 31, 1998, rather than from the
reporting period of December 31, 1997, to December 31, 1998. In addition,
expense reductions by the investment managers increased returns; these
arrangements have been terminated.
***Prior to May 1, 1998, Utility Equity.
<PAGE>
FRANKLIN VALUEMARK FUNDS ANNUAL REPORT TABLE OF CONTENTS
[Celebrating Over 50 years SEAL]
<TABLE>
<S> <C>
LETTER TO CONTRACT OWNERS ............................................. 2
A WORD ABOUT RISK ..................................................... 5
PORTFOLIO OBJECTIVES AND PRIMARY INVESTMENTS .......................... 6
PORTFOLIO SUMMARIES
Portfolios Seeking Capital Growth
Capital Growth Fund ................................................. 9
Global Health Care Securities Fund .................................. 11
Mutual Discovery Securities Fund .................................... 13
Natural Resources Securities Fund ................................... 14
Small Cap Fund ...................................................... 16
Templeton Developing Markets Equity Fund ............................ 18
Templeton Global Growth Fund ........................................ 21
Templeton International Equity Fund ................................. 23
Templeton International Smaller Companies Fund ...................... 25
Templeton Pacific Growth Fund ....................................... 28
Portfolios Seeking Growth and Income
Global Utilities Securities Fund .................................... 31
Growth and Income Fund .............................................. 34
Income Securities Fund .............................................. 36
Mutual Shares Securities Fund ....................................... 38
Real Estate Securities Fund ......................................... 40
Rising Dividends Fund ............................................... 42
Templeton Global Asset Allocation Fund .............................. 45
Value Securities Fund ............................................... 48
Portfolios Seeking Current Income
High Income Fund .................................................... 49
Templeton Global Income Securities Fund ............................. 51
U.S. Government Securities Fund ..................................... 54
Zero Coupon Funds ................................................... 56
Portfolio Seeking Capital Preservation and Income
Money Market Fund ................................................... 59
IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ......................... 61
INDEX DEFINITIONS ..................................................... 62
FINANCIAL HIGHLIGHTS & STATEMENT OF INVESTMENTS ....................... 68
FINANCIAL STATEMENTS .................................................. 163
NOTES TO FINANCIAL STATEMENTS ......................................... 182
INDEPENDENT AUDITORS' REPORT .......................................... 197
TAX INFORMATION ....................................................... 198
PROSPECTUS SUPPLEMENTS ................................................ 199
</TABLE>
- --------------------------------------------------------------------------------
Thank you for investing with Franklin Valuemark. We encourage our investors to
maintain a long-term perspective, and remember that all securities markets move
both up and down, as do portfolio unit prices. We appreciate your past support
and look forward to serving your investment needs in the years ahead.
- --------------------------------------------------------------------------------
FRANKLIN VALUEMARK FUNDS NOW ISSUES ANOTHER CLASS OF SHARES, WHICH IS CALLED
CLASS 2. FOR THAT REASON, THE ORIGINAL SHARE CLASS IN WHICH YOU INVEST HAS BEEN
RENAMED CLASS 1. THERE ARE NO OTHER CHANGES TO CLASS 1 SHARES, WHICH WILL
CONTINUE TO BE AVAILABLE AS BEFORE.
PLEASE RETAIN THIS DOCUMENT, INCLUDING THE ENCLOSED PROSPECTUS SUPPLEMENTS ON P.
199, WITH YOUR CURRENT PROSPECTUS, FOR REFERENCE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO CONTRACT OWNERS
Dear Contract Owners:
Although the one-year reporting period witnessed overall positive stock market
performance for the U.S. and much of Europe, we believe the market correction in
late August, precipitated in part by Russia's debt default and currency
devaluation, proved that these markets were not immune to troubles elsewhere in
the world. The spread of emerging market problems evidently sparked fears of a
liquidity crisis in the U.S., as poor-performing loans began to negatively
affect major American bank balance sheets and prompted the bailout of a major
hedge fund. Many financial institutions curtailed their lending, creating a
"credit crunch" that adversely affected many companies.
The Federal Reserve Board (the Fed) took swift action in an effort to stimulate
growth. Over September, October and November, the Fed's monetary policy panel,
the Federal Open Market Committee, cut the federal funds target rate by 0.75%,
to 4.75%. The Fed's move attempted to provide liquidity to the financial system
and make it easier for major corporations to obtain favorable lending from
banks. This provided a positive boost to equity markets, and the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) ended the year up 28.6%, more than
recouping the losses of August and September.
With less return for their money in the fixed-income markets, investors seemed
willing to pay higher price-to-earnings (P/E) ratios for the largest
capitalization stocks. In fact, much of the rise in the S&P 500 did not come
from higher earnings, but from the rising price investors in general were
willing to pay per dollar of earnings. On December 31, 1998, the average P/E
ratio for the S&P 500 was 31.97, compared with 24.51 a year earlier, while
according to IBES International, an analyst-estimate tracking service, operating
profits for the S&P 500 companies were expected to fall about 1% for 1998. Amid
market uncertainty, investors generally fled to the perceived safety of large
capitalization stocks, and small capitalization, value stocks were generally
left behind in the rally. The Russell 2000(R) Index, which tracks small
capitalization stock performance, was down 2.6% for the year.
2
<PAGE>
European markets closely mirrored those in the U.S., ending the reporting period
up 28.9%, as shown by the Morgan Stanley Capital International(R) (MSCI) Europe
Index, which tracks 15 developed market European countries. The European
Monetary Union (EMU) members continued a policy of fiscal tightening and
monetary policy reform to meet the required membership criteria and to prepare
for the first stage of euro implementation on January 1, 1999. That
implementation is expected to involve the definition and execution of a single
monetary policy in the euro, the setting of euro conversion rates, and the
beginning of foreign exchange transactions in the euro and euro-denominated new
public debt issuance. Also, during the reporting period, Europe came closer to
having a single stock market when the Frankfurt and London stock exchanges
decided to jointly trade Europe's top blue chip shares.
The Japanese and emerging market economies, on the other hand, continued their
downward slide. In our view, Japan's economy went from bad to worse. By October
it had contracted four quarters in a row, despite various fiscal-stimulus
packages. The Nikkei average tumbled to 12,880 in October, its lowest level for
13 years, from the year's high of 17,264 in March. Much of East Asia plunged
into a recession; Russia's economy imploded; and, by the end of the year,
Brazil's economy shrank after spending $30 billion defending its currency.
As mentioned in the semiannual report, the potential upside of the ongoing
turmoil in emerging markets is positive reform, such as more open business
practices and improved treatment of non-controlling and foreign investors.
Although significant risks remain, we continue to be optimistic about the future
performance of emerging market investments. Over the long term, we feel
competition between foreign and domestic investors should drive demand and
prices higher. Although volatility is inevitable in emerging markets, the
increasing activity of bargain-hunting, private equity funds and strategic
investors may boost share prices and add stability to the asset class.
The fixed-income sector was marked by periodic but persistent crises in emerging
market countries last year, while bond yields fell (prices rose) in the world's
major industrial markets. Not surprisingly, emerging market bonds underperformed
higher-quality industrial market bonds during the reporting period. In the U.S.,
the spread between high yield or "junk" bonds and Treasury securities widened,
indicating investors' demand for higher yields to compensate them for taking on
higher risk. Meanwhile corporate bond issuance surged. Even though yield spreads
were wider,
3
<PAGE>
overall corporate borrowing costs declined, thanks to falling Treasury yields.
On December 31, 1998, the benchmark 30-year Treasury bond yielded 5.09%,
compared with 5.93% a year earlier.
It is important to remember, of course, that securities markets always have
been, and always will be, subject to volatility. No one can predict exactly how
they will perform in the future. For this reason, we urge you to exercise
patience and focus not on day-to-day market movements, but on your long-term
investment goals. As always, we appreciate your support, welcome your questions
and comments, and look forward to serving your investment needs in the years
ahead.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
Trustee and Vice President
Franklin Valuemark Funds
4
<PAGE>
A WORD ABOUT RISK
All of the portfolios are subject to certain risks, which will cause investment
returns and the value of your principal to increase or decrease. Generally,
investments offering the potential for higher returns are accompanied by a
higher degree of risk. Stocks and other equities, representing an ownership
interest in an individual company, historically have outperformed other asset
classes over the long term, but tend to rise and fall more dramatically over the
shorter term. Securities of smaller companies, and companies involved in
reorganization or bankruptcy, may have greater price swings and greater credit
and other risks.
Bonds and other debt obligations are affected by the creditworthiness of their
issuers, and changes in interest rates, with prices declining as interest rates
increase. High yield, lower-rated ("junk") bonds generally have greater price
swings and higher default risks than investment grade bonds. An investment in
the Money Market Fund is neither insured nor guaranteed by the U.S. government.
The portfolio attempts to maintain a stable net asset value of $1.00 per share,
but there can be no assurance that it will.
Foreign investing, especially in emerging market countries, has additional risks
such as changes in currency values, market price swings, and economic, political
or social instability. These, and other risks pertaining to specific portfolios,
such as specialized industry or geographical sectors or use of complex
securities, are discussed in the Franklin Valuemark Funds prospectus. Your
investment representative can help you determine which portfolios may be right
for you.
5
<PAGE>
PORTFOLIO OBJECTIVES AND PRIMARY INVESTMENTS
The portfolio descriptions are provided for your convenience. For more complete
information, including portfolio policies and risks, please refer to your
Franklin Valuemark Funds prospectus or contact your investment representative.
PORTFOLIOS SEEKING CAPITAL GROWTH
GLOBAL GROWTH
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL HEALTH CARE SECURITIES FUND Seeks capital appreciation. The portfolio concentrates
its investments in U.S. and foreign equity securities
issued by large and small capitalization health care
companies, including pharmaceutical, biotechnology,
medical and health services and medical supply companies.
- --------------------------------------------------------------------------------------------------------
MUTUAL DISCOVERY SECURITIES FUND Seeks capital appreciation. Using a value-driven
approach, the portfolio invests primarily in U.S. and
foreign equity securities, including securities of small
capitalization companies; may also invest in companies
involved in mergers and bankruptcies, as well as debt
securities of any quality including "junk bonds" and
defaulted securities.
- --------------------------------------------------------------------------------------------------------
NATURAL RESOURCES SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
securities of companies in or related to the natural
resources sector in any nation, including developing
markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS EQUITY FUND Seeks long-term capital appreciation. The portfolio
invests primarily in equity securities of issuers in
foreign countries with developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON GLOBAL GROWTH FUND Seeks long-term capital growth. The portfolio maintains a
flexible policy of investing in stocks and debt
obligations of companies and governments of any nation,
including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON INTERNATIONAL EQUITY FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of companies whose primary
operations are outside the U.S., including developing
markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND Seeks long-term capital appreciation. The portfolio
invests primarily in equity securities of smaller
companies outside the U.S., including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON PACIFIC GROWTH FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of companies whose primary
operations are in Pacific Rim countries, most of which
have developing markets.
- --------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
PORTFOLIOS SEEKING CAPITAL GROWTH (CONT.)
DOMESTIC GROWTH
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
CAPITAL GROWTH FUND Seeks capital appreciation, with current income as a
secondary consideration. The portfolio invests primarily
in equity securities of large- or mid-cap U.S. companies,
and to a lesser extent in small-cap companies. The
portfolio may also invest a portion in foreign
securities, including developing markets.
- --------------------------------------------------------------------------------------------------------
SMALL CAP FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of small capitalization
growth companies. The portfolio may also invest a portion
in foreign securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIOS SEEKING GROWTH AND INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL UTILITIES SECURITIES FUND Seeks both capital appreciation and current income. The
(Prior to May 1, 1998, portfolio concentrates its investments in securities of
the Utility Equity Fund.) issuers in the public utilities industry (such as
electricity and telecommunications companies) in any
nation, including developing markets.
- --------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
U.S. common stocks and securities convertible into common
stocks, and may invest a portion in foreign securities,
including developing markets.
- --------------------------------------------------------------------------------------------------------
INCOME SECURITIES FUND Seeks to maximize income while maintaining prospects for
capital appreciation. The portfolio invests in debt and
equity securities, including "junk bonds." The portfolio
may invest in foreign securities, including developing
markets.
- --------------------------------------------------------------------------------------------------------
MUTUAL SHARES SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. Using a value-driven approach, the
portfolio invests primarily in domestic equities,
including common and preferred stocks and convertible
securities; may also invest in companies involved in
mergers and bankruptcies, as well as debt securities of
any quality, including "junk bonds" and defaulted
securities. The portfolio may also invest in foreign
securities.
- --------------------------------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio concentrates its
investments in real estate investment trusts (REITs) and
publicly traded securities of companies in the real
estate industry.
- --------------------------------------------------------------------------------------------------------
RISING DIVIDENDS FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
the equity securities of companies that have paid
consistently rising dividends over the past ten years.
Preservation of capital is also an important
consideration. The portfolio may also invest a small
portion in foreign securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
PORTFOLIOS SEEKING GROWTH AND INCOME (CONT.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
TEMPLETON GLOBAL ASSET ALLOCATION FUND Seeks a high level of total return. The portfolio has a
flexible policy of investing in equity securities, debt
obligations and money market instruments of companies and
governments of any nation, including developing markets.
In addition, the portfolio may invest in "junk bonds."
- --------------------------------------------------------------------------------------------------------
VALUE SECURITIES FUND Seeks long-term total return. The portfolio invests
primarily in securities of companies, which in the
portfolio manager's opinion, are selling substantially
below the underlying value of their assets or private
market value. Such companies may include small
capitalization companies, takeover candidates,
turnarounds and companies emerging from bankruptcy. The
portfolio may also invest a portion in foreign
securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS SEEKING CURRENT INCOME
- --------------------------------------------------------------------------------------------------------
<S> <C>
HIGH INCOME FUND Seeks a high level of current return, with capital
appreciation as a secondary objective. The portfolio
invests in debt securities and dividend-paying common and
preferred stocks, which may include high risk securities
and "junk bonds." The portfolio may also invest in
foreign securities, including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON GLOBAL INCOME SECURITIES FUND Seeks high current income, with capital appreciation as a
secondary objective. The portfolio invests in debt
securities from any nation, including developing markets.
The portfolio may also invest in lower-rated debt
securities.
- --------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND Seeks to earn income. The portfolio invests exclusively
in obligations of the U.S. government, its agencies or
instrumentalities, with an emphasis on mortgage-backed
securities.
- --------------------------------------------------------------------------------------------------------
THREE ZERO COUPON FUNDS The three zero coupon bond portfolios seek a high
(MATURITY DATES: 2000, 2005, 2010) investment return consistent with preservation of
capital. Each zero coupon portfolio seeks to return a
reasonably assured target dollar amount, predictable at
the time of the investment, on a specific date in the
future. The portfolios may not be appropriate for those
who intend to redeem units before the maturity dates.
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
- --------------------------------------------------------------------------------------------------------
<S> <C>
MONEY MARKET FUND Seeks high current income consistent with capital
preservation and liquidity. The portfolio invests in
high-quality money market instruments.
- --------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
PORTFOLIO SUMMARIES
As you read the following portfolio summaries, please remember the discussions
accurately reflect our views, opinions and portfolio holdings as of December 31,
1998, the end of the reporting period. However, they are not necessarily
complete analyses of every aspect of any industry, security or investment. Keep
in mind that market and economic conditions are changing constantly, which can
be expected to affect our strategies and the portfolios' composition. Although
historical performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
GRAPHIC MATERIAL (1)
This chart shows the top 10 industry breakdown based on the percentage of total
net assets on 12/31/98 for Capital Growth Fund.
- -------------------------------------------------------------------------------
TOP 10 INDUSTRY BREAKDOWN
Capital Growth Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- -------------------------------------------------------
<S> <C>
Electronic Technology 16.0%
Health Technology 13.3%
Technology Services 6.3%
Finance 5.6%
Consumer Non-Durables 5.4%
Process Industries 5.3%
Retail Trade 4.4%
Utilities 4.1%
Transportation 3.3%
Consumer Services 2.9%
</TABLE>
- -------------------------------------------------------------------------------
PORTFOLIOS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
This marks the fourth consecutive year in which major equity market indices
posted strong gains, as demonstrated by the portfolio's +20.29% return, versus
+28.6% by the S&P 500 Stock Index, for the year ended December 31, 1998.*
However, despite domestic equity markets' healthy performance, the year under
review presented many challenges. Asian difficulties not only slowed economies
in that region, but evidently impacted the global economy as well. Numerous
reasons, including concerns regarding a potential slowing in the worldwide
economy, sparked a U.S. market sell-off beginning in mid-July. From mid-July to
early October, the S&P 500 Stock Index declined approximately 19%. Smaller
capitalization stocks fared worse as the Russell 2000 Index declined
approximately 37% from its peak in April. In late September, the Federal Reserve
Board lowered the federal funds target rate to stimulate the U.S. economy, and
followed this initial rate cut with two subsequent cuts for an overall 0.75%
reduction, which led to an equity market rally lasting through year-end.
During the year's market volatility, we stayed with the fund's core, long-term
growth, investment philosophy, seeking companies we believe have promising
growth prospects and superior management. We invest for the long term, using a
buy-and-hold strategy, which keeps turnover low, and should provide investors
with consistent growth over time.
In the past year, technology sector investments enhanced portfolio performance.
The fund's largest investment was in Cisco Systems Inc., a leading provider of
the
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
You will find a complete listing of the portfolios' securities including the
number of shares and dollar value beginning on page 72 of this report.
9
<PAGE>
networking communications equipment that enables Internet growth. Cisco shares
appreciated approximately 150% during the reporting period. The fund's
investments in Microsoft Corp., International Business Machines Corp., Applied
Materials Inc. and Compaq Computer Corp. also proved to be strong performers
during the year. Furthermore, notable non-technology sector investments such as
Amgen Inc., McDonald's Corp., Providian Financial Corp., Charles Schwab Corp.
and Wal-Mart Stores Inc. posted solid returns, with each of these stocks
appreciating more than 50% during 1998.
As is typical in any year, certain investments within the portfolio did not live
up to our expectations. In the past year, positions in companies with exposure
to the natural resources sector, including oil-related companies, performed
poorly. We think this was partly due to slack demand from Asia and related
deflationary pressures, as well as a general over-capacity situation for many
commodity products. Although it held less exposure to natural resource-related
securities than the overall market allocation, the portfolio did experience
declines in its holdings of Schlumberger Ltd., Barrett Resources Corp. and Royal
Dutch Petroleum Co. in the oil and oil services industries. The portfolio also
experienced losses in consumer products companies such as Campbell Soup, Mattel
and a consumer services company, Mirage Resorts, as these companies failed to
meet earnings expectations.
As we move into 1999, we are optimistic that the low interest-rate environment
may foster continued economic expansion in the U.S. As stated in previous
shareholder letters, we believe that the double-digit earnings growth
experienced in the recent past is not likely to continue. In addition, as of the
writing of this letter, the U.S. House of Representatives impeached the
President, hostilities continued in the Middle East and corporations worldwide
faced a potential Year 2000 computer problem. These uncertainties add risk to
the equity markets and are likely to contribute to further volatility in 1999.
We intend to weather this expected volatility by sticking closely to our
investment goal of finding outstanding growth companies for long-term
investments.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (3)
This chart shows the average annual total return for the Capital Growth Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +20.29%
Since Inception (5/1/96) +19.72%
</TABLE>
GRAPHIC MATERIAL (2)
This graph compares the performance of Capital Growth Fund as tracked by the
growth in value of a $10,000 investment, to that of the S&P 500 and the Russell
1000 Index from 5/1/96 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Capital Growth Fund
$10,000 Investment (5/1/96-12/31/98)
[LINE GRAPH]
<TABLE>
<CAPTION>
CAPITAL GROWTH S&P500 RUSSELL 1000 INDEX
-------------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,220 2.58% $10,258 2.40% $10,240
6/30/96 $10,180 0.38% $10,297 0.11% $10,251
7/31/96 $9,790 -4.42% $9,842 -4.82% $9,757
8/31/96 $10,180 2.11% $10,050 2.72% $10,023
9/30/96 $10,910 5.63% $10,615 5.62% $10,586
10/31/96 $10,880 2.76% $10,908 2.21% $10,820
11/30/96 $11,750 7.56% $11,733 7.38% $11,618
12/31/96 $11,360 -1.98% $11,501 -1.62% $11,430
1/31/97 $11,910 6.25% $12,219 5.93% $12,108
2/28/97 $11,470 0.78% $12,315 0.38% $12,154
3/31/97 $10,870 -4.11% $11,809 -4.50% $11,607
4/30/97 $11,290 5.97% $12,514 5.41% $12,235
5/31/97 $12,270 6.09% $13,276 6.40% $13,018
6/30/97 $12,479 4.48% $13,870 4.14% $13,557
7/31/97 $13,290 7.96% $14,974 8.18% $14,666
8/31/97 $12,959 -5.60% $14,136 -4.72% $13,974
9/30/97 $13,740 5.48% $14,911 5.48% $14,739
10/31/97 $13,099 -3.34% $14,413 -3.24% $14,262
11/30/97 $13,320 4.63% $15,080 4.34% $14,881
12/31/97 $13,440 1.72% $15,339 2.03% $15,183
1/31/98 $13,360 1.11% $15,509 0.74% $15,295
2/28/98 $14,381 7.21% $16,628 7.13% $16,386
3/31/98 $14,692 5.12% $17,479 5.04% $17,212
4/30/98 $14,992 1.01% $17,656 1.03% $17,389
5/31/98 $14,512 -1.72% $17,352 -2.16% $17,013
6/30/98 $15,081 4.06% $18,056 3.70% $17,643
7/31/98 $14,759 -1.07% $17,863 -1.20% $17,431
8/31/98 $12,849 -14.46% $15,280 -14.95% $14,825
9/30/98 $13,503 6.41% $16,260 6.73% $15,823
10/31/98 $14,548 8.13% $17,582 7.90% $17,073
11/30/98 $15,172 6.06% $18,647 6.19% $18,130
12/31/98 $16,167 6.56% 5.76% $19,721 6.37% $19,284
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
10
<PAGE>
GLOBAL HEALTH CARE SECURITIES FUND
Global Health Care Securities Fund was launched on May 1, 1998, to give Franklin
Valuemark investors an opportunity to directly participate in the strong trends
driving the health care sector. We believe that this sector may be an extremely
attractive investment area over the long term, due to technology advances, the
aging global population and emerging health care systems in many populous third
world nations. Additionally, the historically stable demand for health care
products and services has generally been less affected by business cycles or
interest rates. While the federal government and managed care operators are
likely to put continuing pressure on reimbursement, as of the end of the
reporting period the health care industry's near-term outlook appeared benign,
in our view, with the worst cuts behind it. Of course, like any industry sector
fund, this portfolio is most appropriate as part of a diversified investment
program.
Global Health Care Securities Fund may concentrate a majority of its assets in
small- and mid-capitalization companies. Through rigorous fundamental analysis,
we attempt to uncover companies that are often overlooked by most investors and
offer strong growth prospects at attractive valuations. We also favor companies
that have little competition, experienced management, significant competitive
advantages and consistent earnings growth track records.
The U.S. market was extremely volatile during the reporting period. In our view,
this was primarily due to the domestic political turmoil caused by President
Clinton's impeachment and concerns about Asia's problems and their impact on the
U.S. economy. However, the year ended on a vigorous note as technology shares
rallied on strong earnings reports and rosy forecasts for the upcoming year.
Although the portfolio did post a positive +7.10% cumulative total return for
the period from inception on May 1, 1998, to December 31, 1998, it
underperformed such broader market indices as the S&P 500, as did the health
care sector, due to the strength of technology stocks.
The portfolio's largest sector for most of the year was pharmaceuticals, which
represented over 20% of total net assets at year-end. These stocks performed
exceptionally well, outpacing the S&P 500 by a wide margin. Pharmaceutical
expenditures grew at record levels in 1998 as many new drugs enjoyed successful
launches, and existing products expanded their markets. Heavy investment in
research and development should result in continued new product development and,
we think, signals an excellent long-term outlook for the sector. Our largest
pharmaceutical and overall holding was Bristol-Myers Squibb Co. We feel that
Bristol has a balanced core portfolio of drugs with several strong prospects in
the pipeline, and are particularly encouraged by the company's work on new drugs
for hypertension and hepatitis B. Also, the company made several management
changes during the period, which we feel should better position it for the
future.
GRAPHIC MATERIAL (4)
This chart shows the top 5 holdings based on the percentage of total net assets
on 12/31/98 for the Global Health Care Securities Fund.
TOP 5 HOLDINGS
Global Health Care Securities Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- --------------------------------------------------
<S> <C>
Bristol-Meyers Squibb Co. 5.95%
Pfizer Inc. 4.88%
Serologicals Corp. 4.60%
American Home Products Corp. 4.26%
Omnicare Inc. 4.17%
</TABLE>
11
<PAGE>
Throughout the reporting period, our weighting in the pharmaceutical sector
steadily increased. Since the stocks were trading at very high valuations,
compared with their historical ranges, we purchased them on dips. Heavy buying
during the market decline in August and September paid off in the fourth quarter
of 1998 when the market rebounded strongly. As of the end of the reporting
period, valuations returned to prior levels, which led us to sell Eli Lilly &
Co., the manufacturer of Prozac. We expect this sector to be volatile in 1999 as
members of Congress are proposing a drug subsidy for seniors in the Medicare
program. The renewed prospect of price controls may spook investors who remember
the health care reform proposals that rocked the drug stocks five years ago.
Although the proposal would improve access to drugs, the Medicare program, which
is projected to be insolvent in 2008, would likely have difficulty funding such
a benefit. If health care stock prices decline as a result of this uncertainty,
we anticipate an opportunity to increase our holdings in the sector.
Two of our strongest performers during the period, Access Health Inc. and
Transitions Systems Inc., appreciated when they were acquired by larger
companies. Access Health provides health care consulting services over the phone
to health plan members and was acquired by HBO & Co., the leading provider of
health care information systems. Transitions Systems, a niche leader in the
hospital cost accounting software market, was acquired by Eclipsys Corp., an HBO
competitor. We expect consolidation to be a major health care industry theme,
with positive effects.
We did have two disappointments during the period. In August, Total Renal Care
Holdings, Inc., a leading global provider of kidney dialysis services,
unexpectedly announced that one of Medicare's fiscal intermediaries was
questioning the company's recent spike in lab test utilization. This disclosure
resulted in a one-day, 16% drop in the stock price. We concluded that this probe
would take much longer than widely believed and subsequently sold the stock at a
slight loss.
Our second disappointment was ESC Medical Systems Ltd., a manufacturer of laser
and pulsed light medical devices for hair removal and other cosmetic procedures.
In September, the company announced it would not meet earnings expectations due
to weak revenue growth in its international markets, especially in Germany and
Brazil. Over a two-day period, the stock declined nearly 70%. We believe that
such examples highlight the risk of investing in a highly volatile and rapidly
changing sector. However, through our exhaustive research process and years of
experience following the health care industry, we hope to minimize these events.
We look forward to serving your investment needs in the years to come. Our goal,
as always, is to seize upon, in a timely and disciplined fashion, the
possibilities we
12
<PAGE>
find in the health care sector, and to provide our shareholders unique
opportunities to invest in today's newest and fastest growing health care
companies.
GRAPHIC MATERIAL (5)
This graph compares the performance of Global Health Care Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the S&P Health Care Composite Index* from 5/1/98-12/31/98. *Standard &
Poor's Health Care Composite Index was added this year by the fund manager.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Global Health Care Securities Fund
$10,000 Investment (5/1/98-12/31/98)
[LINE GRAPH}
<TABLE>
<CAPTION>
Global Health Care S & P 500 S&P Health Care
Securities Fund Composite Index
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/98 $10,000 $10,000 $10,000
5/31/98 $ 9,560 -1.72% $ 9,828 -1.93% $ 9,807
6/30/98 $10,070 4.06% $10,227 7.31% $10,524
7/31/98 $ 9,630 -1.07% $10,118 0.53% $10,580
8/31/98 $ 8,260 -14.46% $ 8,655 -11.23% $ 9,392
9/30/98 $ 9,320 6.41% $ 9,209 11.87% $10,506
10/31/98 $ 9,430 8.13% $ 9,958 3.62% $10,887
11/30/98 $10,090 6.06% $10,562 6.11% $11,552
12/31/98 $10,710 5.76% $11,170 4.31% $12,050
</TABLE>
<TABLE>
<S> <C> <C> <C>
Return 7.10% 11.70% 20.50%
</TABLE>
*Standard & Poor's Health Care Composite Index was added this year by the Fund
Manager.
MUTUAL DISCOVERY SECURITIES FUND
Mutual Discovery Securities Fund generated a -5.00% cumulative total return for
the year under review. Large-cap value stocks, which typically have held up
better than growth stocks in market downturns, generally did not do so during
last summer's two-month market correction. The Standard & Poor's 500's largest
growth stocks, such as Microsoft Corp., Dell Corp. and Intel Corp., continued
their extraordinary growth, pushing the major indices to record levels. Internet
stocks traded at levels that confounded even traditional growth investors. Some
perceived pockets of value, such as oil service companies, just got cheaper over
the course of the year. We feel the relatively weak performance of value stocks
contributed to the portfolio's flat performance during the period.
Some of our largest positions did perform well during the year. Montedison SpA,
Suez Lyonnaise des Eaux SA, MediaOne Group Inc. and Morgan Stanley Dean Witter &
Co. were all up significantly. Financial services stocks remained a major
portfolio focus. During the third quarter market correction we made a
significant investment in the brokerage sector, initiating positions in Lehman
Brothers Holdings Inc. and Bear Stearns Co. Inc., as well as various European
holding companies. We also added to our holdings in Morgan Stanley Dean Witter &
Co.
Companies involved in deals and restructurings should again present
opportunities in 1999. Two businesses we like are Investor AB, the Wallenberg
family's Swedish holding company, and Brierley Investments Ltd., a New Zealand
investment company trading at a substantial discount.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (6)
This chart shows the return for the Global Health Care Securities Fund as of
12/31/98.
<TABLE>
<CAPTION>
Aggregate Total Return*
- ---------------------------------------------
<S> <C>
Since Inception (5/1/98) +7.10%
</TABLE>
*Since the fund has existed for less than one year, the figures represent the
aggregate total return since inception; therefore, average annual total returns
are not provided.
GRAPHIC MATERIAL (7)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Mutual
Discovery Securities Fund.
TOP 10 HOLDINGS
Mutual Discovery Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Suez Lyonnaise des Eaux SA 3.02%
Business & Public Services, France
Kansas City Southern Industries Inc. 2.93%
Multi-Industry, US
Investor AB, A and B 2.41%
Multi-Industry, Sweden
Electrafina SA 1.91%
Energy Sources, Belgium
Cie Financiere Richemont AG, A 1.80%
Multi-Industry, Switzerland
Montedison SpA 1.65%
Multi-Industry, Italy
CGIP-Compagnie Generale
Industrie de Participation 1.63%
Multi-Industry, France
Railtrack Group Plc. 1.59%
Transportation, UK
Custos AB, A and B 1.35%
Multi-Industry, Sweden
Societe Elf Aquitaine SA, Br. 1.32%
Energy Sources, France
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
13
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (9)
This chart shows the average annual total return for the Mutual Discovery
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------
<S> <C>
1-Year -5.00%
Since Inception (11/8/96) +7.02%
</TABLE>
Looking forward, we are confident that our disciplined value and special
situation approach, which has been deeply out of favor, will prove rewarding.
Effective, November 1, 1998, Rob Friedman and David Marcus assumed their roles
as portfolio co-managers. This change is designed to combine the benefits of our
team approach with the increased focus and accountability that portfolio
assignments create. The managers will continue to benefit from the ideas of all
the investment professionals at the firm.
GRAPHIC MATERIAL (8)
This graph compares the performance of Mutual Discovery Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the Russell 2000 Index from 11/8/96 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Mutual Discovery Securities Fund
$10,000 Investment (11/8/96-12/31/98)
[LINE GRAPH]
<TABLE>
<CAPTION>
MUTUAL DISCOVERY SECURITIES S&P500 RUSSELL 2000 INDEX
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/8/96 $10,000 $10,000 $10,000
11/30/96 $10,130 5.54% $10,554 3.02% $10,302
12/31/96 $10,200 -1.98% $10,345 2.62% $10,572
1/31/97 $10,660 6.25% $10,992 2.00% $10,783
2/28/97 $10,790 0.78% $11,078 -2.42% $10,523
3/31/97 $10,690 -4.11% $10,622 -4.72% $10,026
4/30/97 $10,630 5.97% $11,257 0.28% $10,054
5/31/97 $10,910 6.09% $11,942 11.12% $11,172
6/30/97 $11,325 4.48% $12,477 4.29% $11,651
7/31/97 $11,735 7.96% $13,470 4.65% $12,193
8/31/97 $11,715 -5.60% $12,716 2.29% $12,472
9/30/97 $12,356 5.48% $13,413 7.32% $13,385
10/31/97 $11,975 -3.34% $12,965 -4.39% $12,798
11/30/97 $12,025 4.63% $13,565 -0.65% $12,714
12/31/97 $12,175 1.72% $13,798 1.75% $12,937
1/31/98 $12,155 1.11% $13,952 -1.58% $12,732
2/28/98 $12,796 7.21% $14,958 7.39% $13,673
3/31/98 $13,496 5.12% $15,723 4.12% $14,237
4/30/98 $13,756 1.01% $15,882 0.55% $14,315
5/31/98 $13,896 -1.72% $15,609 -5.39% $13,543
6/30/98 $13,483 4.06% $16,243 0.21% $13,572
7/31/98 $12,971 -1.07% $16,069 -8.10% $12,473
8/31/98 $11,127 -14.46% $13,745 -19.42% $10,050
9/30/98 $10,655 6.41% $14,626 7.83% $10,837
10/31/98 $10,922 8.13% $15,816 4.08% $11,280
11/30/98 $11,485 6.06% $16,774 5.24% $11,871
12/31/98 $11,567 5.76% $17,740 6.19% $12,605
</TABLE>
NATURAL RESOURCES SECURITIES FUND
During the year under review, widespread concerns about a global economic
slowdown caused increased market volatility in the natural resources sector. We
feel the economic and political turmoil in Asia, Russia and Latin America, in
particular, caused investors to question future demand levels for a wide range
of commodities, including energy, chemicals, steel and paper. As a result,
prices tumbled, industry production levels declined and company profitability
soured. Some regions took preemptive efforts to ease monetary policy and others
strove to improve economic stability, in an effort to stimulate worldwide
commodity demand growth. In conjunction with industry efforts to curtail
production, we believe the global balance between production and consumption may
begin to improve. Additionally, historically low commodity prices pressured many
companies to lower costs through technological advances and consolidation -- a
valuable exercise in any price climate.
Generally, we invest in well-managed companies with fast-growing, highly
efficient, technologically advanced operations throughout the steel, chemical,
services, oil and gas, precious and base metal, and forest and paper sectors. We
do not base our investments solely on the assumption that commodity prices will
rise or fall. Rather, we look for companies with unique assets, healthy balance
sheets, strong market positions, technological superiority, rapid, low-cost
production growth and visible earnings growth.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
14
<PAGE>
Our belief that prices and company profitability may improve significantly as
supply/demand balances move into equilibrium underlies the fund's focus on the
energy sector. As of the end of the reporting period, evidence demonstrating
OPEC production cutbacks and non-OPEC production declines, associated with the
lack of investment in marginal properties, supported our conviction that energy
companies offered significant value under recent depressed conditions. An
improvement in fundamentals may be reflected in the fourth-quarter rally from
trough levels. While oilfield service companies like Varco International Inc.,
Atwood Oceanics Inc. and Transocean Offshore Inc. underperformed during the
first three quarters of the year, they appear to have bottomed and have begun to
reverse their decline. In the case of Varco International, the company should
continue to benefit from high demand for its value-added drilling rig equipment,
which makes oil and gas drilling safer and more productive. Atwood Oceanics and
Transocean Offshore, leaders in the worldwide market for deep-water offshore
drilling, may also continue to experience rising demand for their premium rigs
capable of more cost-effective deep water drilling.
A theme that emerged among our holdings in the natural resource sector was
consolidation, as many companies strove to improve their market positions by
developing economies of scale, diversifying their product portfolios and service
capabilities, and gaining significant cost savings and integration synergies. In
the energy sector, Ocean Energy, Inc. and United Meridian Corp. (exploration and
production) merged, creating a leading, independent producer of oil and gas with
a geographically balanced portfolio. In oilfield services, Falcon Drilling Co.,
Inc. and Reading & Bates Corp. merged to create R&B Falcon Corp., a diversified
offshore drilling contractor with a full complement of drilling rigs. Paper and
forest products also saw consolidation, with Bowater Inc. successfully acquiring
Canadian-based Avenor Inc. and Korean-based Halla Pulp & Paper Co., thus
creating a low-cost global newsprint business. Finally, in the precious metals
sector, Placer Dome, Inc. recently took a stake in Getchell Resources Inc.,
increasing its exposure to lower-cost reserves. By the end of the reporting
period we sold Ocean Energy, United Meridian, R&B Falcon and Placer Dome because
we believed they no longer offered superior risk-adjusted returns compared with
other companies in the sector.
Although the portfolio has had successful periods from time to time since its
inception, performance during the reporting period suffered some
disappointments. Crude oil declined more significantly than expected, as a
number of factors, including reduced demand expectations in Asia, higher levels
of OPEC production, the return of Iraqi oil to the world market and a warmer
than normal winter season in much of the northern hemisphere, combined to
depress world markets. The 31% decline in crude oil prices during 1998
negatively impacted the fund's positions in exploration and production companies
including Gulf Canada Resources Ltd. and Nuevo
GRAPHIC MATERIAL (10)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Natural
Resources Securities Fund.
TOP 10 HOLDINGS
Natural Resources Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------------------------
<S> <C>
Barrett Resources Corp. 3.8%
Energy Minerals, U.S.
AES Corp. 3.3%
Industrial Services, U.S.
Newfield Exploration Co. 3.0%
Energy Minerals, U.S.
Stillwater Mining Co. 2.9%
Non-Energy Minerals, U.S.
Enron Oil & Gas Co. 2.7%
Energy Minerals, U.S.
Weatherford International Inc. 2.5%
Producer Manufacturing, U.S.
Enron Corp. 2.5%
Utilities, U.S.
Royal Dutch Petroleum Co., ADR 2.4%
Energy Mineral, Netherlands
Texaco Inc. 2.4%
Energy Minerals, U.S.
De Beers Consolidated Mines AG, ADR 2.0%
Non-Energy Minerals, South Africa
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (12)
This chart shows the average annual total return for the Natural Resources
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year -25.38%
5-Year -8.81%
Since Inception (1/24/89) -0.25%
</TABLE>
- --------------------------------------------------------------------------------
Energy Co. Our focus in this sector remains on companies with superior asset
bases, low-cost operations and attractive reserve and production growth
profiles, which over time should provide significant rewards to shareholders.
The unexpectedly strong performance of the paper and forest products sector, in
which the portfolio was relatively underweighted (6.5% of total net assets),
also hurt our performance relative to broader market indices. We began to add to
the group by establishing new positions in Smurfit-Stone Container Corp. and
increasing our weighting in existing holdings like Bowater.
Despite the potential for continued volatility, our outlook for 1999 remains
positive. We hold fast to our belief that the long-term prospects for natural
resources companies remain bright, and are convinced that Natural Resources
Securities Fund is well positioned in this sector, with investments in companies
that have superior management, lower costs, and the potential to add value
throughout commodity price cycles.
GRAPHIC MATERIAL (11)
This graph compares the performance of Natural Resources Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the FT/S&P Actuaries World: Energy 50%/Basic Industries 50% Composite Index
from 1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including
any applicable sales charges. Index is a Standard & Poor Micropal.
TOTAL RETURN INDEX COMPARISON
Natural Resources Securities Fund
$10,000 Investment (1/24/89-12/31/98)
<TABLE>
<CAPTION>
FT/S&P ACTUARIES WORLD:
ENERGY 50%/BASIC
NATURAL RESOURCES INDUSTRIES 50% COMPOSITE
SECURITIES FUND S&P 500 INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/24/89 $10,000 $ 10,000 $10,000
01/31/89 $10,020 1.65% $ 10,165 1.14% $10,114
02/28/89 $10,080 -2.49% $ 9,912 1.32% $10,247
03/31/89 $10,150 2.33% $ 10,143 2.99% $10,553
04/30/89 $10,220 5.19% $ 10,670 1.37% $10,698
05/31/89 $10,090 4.05% $ 11,102 -3.74% $10,298
06/30/89 $10,360 -0.57% $ 11,038 -2.13% $10,079
07/31/89 $10,500 9.03% $ 12,035 8.52% $10,937
08/31/89 $10,750 1.96% $ 12,271 -2.08% $10,710
09/30/89 $11,110 -0.41% $ 12,221 2.35% $10,961
10/31/89 $11,180 -2.32% $ 11,937 -1.71% $10,774
11/30/89 $12,230 2.04% $ 12,181 4.66% $11,276
12/31/89 $12,430 2.40% $ 12,473 5.26% $11,869
01/31/90 $12,920 -6.71% $ 11,636 -3.20% $11,489
02/28/90 $12,180 1.29% $ 11,786 -2.44% $11,209
03/31/90 $12,038 2.65% $ 12,099 -5.91% $10,547
04/30/90 $11,258 -2.49% $ 11,797 -2.37% $10,297
05/31/90 $11,947 9.75% $ 12,948 9.62% $11,287
06/30/90 $11,380 -0.67% $ 12,861 -1.81% $11,083
07/31/90 $12,038 -0.32% $ 12,820 6.58% $11,812
08/31/90 $11,694 -9.04% $ 11,661 -6.70% $11,021
09/30/90 $11,501 -4.87% $ 11,093 -8.52% $10,082
10/31/90 $10,448 -0.43% $ 11,045 5.82% $10,669
11/30/90 $10,185 6.46% $ 11,759 -2.89% $10,360
12/31/90 $10,651 2.79% $ 12,087 0.57% $10,419
01/31/91 $ 9,831 4.36% $ 12,614 -0.21% $10,397
02/28/91 $10,701 7.15% $ 13,516 11.49% $11,592
03/31/91 $10,610 2.42% $ 13,843 -3.61% $11,174
04/30/91 $10,560 0.24% $ 13,876 1.95% $11,391
05/31/91 $10,853 4.31% $ 14,474 0.38% $11,435
06/30/91 $11,258 -4.58% $ 13,811 -5.14% $10,847
07/31/91 $11,382 4.66% $ 14,455 4.99% $11,388
08/31/91 $10,814 2.37% $ 14,797 -0.97% $11,278
09/30/91 $10,834 -1.67% $ 14,550 2.73% $11,586
10/31/91 $11,227 1.34% $ 14,745 2.09% $11,828
11/30/91 $11,361 -4.03% $ 14,151 -6.92% $11,009
12/31/91 $10,617 11.44% $ 15,770 4.17% $11,468
01/31/92 $11,340 -1.86% $ 15,476 -1.97% $11,242
02/29/92 $11,165 1.29% $ 15,676 -2.32% $10,982
03/31/92 $10,752 -1.95% $ 15,370 -3.62% $10,584
04/30/92 $10,607 2.94% $ 15,822 4.86% $11,099
05/31/92 $11,123 0.49% $ 15,900 4.76% $11,627
06/30/92 $11,407 -1.49% $ 15,663 -4.55% $11,098
07/31/92 $11,492 4.09% $ 16,303 -0.54% $11,038
08/31/92 $11,120 -2.05% $ 15,969 2.01% $11,260
09/30/92 $10,982 1.17% $ 16,156 -0.85% $11,164
10/31/92 $10,313 0.34% $ 16,211 -5.05% $10,600
11/30/92 $ 9,612 3.40% $ 16,762 -0.83% $10,512
12/31/92 $ 9,941 1.23% $ 16,968 0.99% $10,616
01/31/93 $ 9,867 0.84% $ 17,111 0.59% $10,679
02/28/93 $10,355 1.36% $ 17,344 4.15% $11,122
03/31/93 $11,343 2.11% $ 17,710 6.40% $11,834
04/30/93 $12,108 -2.42% $ 17,281 5.82% $12,523
05/31/93 $13,658 2.67% $ 17,742 2.18% $12,796
06/30/93 $13,737 0.29% $ 17,794 -2.39% $12,490
07/31/93 $14,957 -0.40% $ 17,723 2.48% $12,800
08/31/93 $13,823 3.79% $ 18,394 3.73% $13,277
09/30/93 $12,689 -0.77% $ 18,253 -2.01% $13,010
10/31/93 $13,887 2.07% $ 18,631 1.72% $13,234
11/30/93 $13,769 -0.95% $ 18,454 -5.69% $12,481
12/31/93 $15,471 1.21% $ 18,677 4.54% $13,048
01/31/94 $15,578 3.40% $ 19,312 7.71% $14,054
02/28/94 $14,925 -2.71% $ 18,789 -1.55% $13,836
03/31/94 $15,096 -4.36% $ 17,969 -3.50% $13,351
04/30/94 $14,390 1.28% $ 18,199 5.19% $14,044
05/31/94 $14,861 1.64% $ 18,498 0.29% $14,085
06/30/94 $14,546 -2.45% $ 18,045 -0.36% $14,034
07/31/94 $14,826 3.28% $ 18,637 3.82% $14,571
08/31/94 $15,482 4.10% $ 19,401 2.70% $14,964
09/30/94 $16,494 -2.44% $ 18,927 -1.85% $14,687
10/31/94 $15,905 2.25% $ 19,353 4.39% $15,332
11/30/94 $14,635 -3.64% $ 18,649 -5.74% $14,452
12/31/94 $15,162 1.48% $ 18,925 -0.02% $14,449
01/31/95 $13,376 2.59% $ 19,415 -1.25% $14,268
02/28/95 $13,978 3.90% $ 20,172 0.79% $14,381
03/31/95 $15,280 2.95% $ 20,767 5.24% $15,135
04/30/95 $15,431 2.94% $ 21,378 4.23% $15,775
05/31/95 $15,323 4.00% $ 22,233 -0.10% $15,759
06/30/95 $15,309 2.32% $ 22,748 -2.11% $15,427
07/31/95 $15,805 3.32% $ 23,504 4.87% $16,178
08/31/95 $15,705 0.25% $ 23,563 -2.96% $15,699
09/30/95 $15,772 4.22% $ 24,557 1.10% $15,872
10/31/95 $14,008 -0.36% $ 24,468 -2.09% $15,540
11/30/95 $15,232 4.39% $ 25,543 3.49% $16,082
12/31/95 $15,518 1.93% $ 26,036 3.73% $16,682
1/31/96 $18,086 3.40% $ 26,921 1.86% $16,992
2/29/96 $18,218 0.93% $ 27,171 0.68% $17,108
3/31/96 $18,307 0.96% $ 27,432 4.16% $17,820
4/30/96 $18,406 1.47% $ 27,835 2.69% $18,299
5/31/96 $19,111 2.58% $ 28,553 -0.42% $18,222
6/30/96 $16,850 0.38% $ 28,662 -0.29% $18,169
7/31/96 $16,500 -4.42% $ 27,395 -3.34% $17,562
8/31/96 $17,133 2.11% $ 27,973 1.88% $17,893
9/30/96 $16,173 5.63% $ 29,548 3.08% $18,444
10/31/96 $16,286 2.76% $ 30,363 2.12% $18,835
11/30/96 $16,139 7.56% $ 32,659 3.56% $19,505
12/31/96 $16,139 -1.98% $ 32,012 -0.50% $19,408
1/31/97 $15,337 6.25% $ 34,013 0.52% $19,509
2/28/97 $17,088 0.78% $ 34,278 -0.77% $19,358
3/31/97 $15,303 -4.11% $ 32,870 1.40% $19,629
4/30/97 $14,456 5.97% $ 34,832 0.01% $19,631
5/31/97 $15,348 6.09% $ 36,953 5.79% $20,768
6/30/97 $14,761 4.48% $ 38,609 3.52% $21,499
7/31/97 $14,818 7.96% $ 41,682 3.59% $22,271
8/31/97 $15,093 -5.60% $ 39,348 -4.63% $21,240
9/30/97 $16,102 5.48% $ 41,504 4.22% $22,136
10/31/97 $14,807 -3.34% $ 40,118 -5.97% $20,815
11/30/97 $13,145 4.63% $ 41,975 -3.61% $20,063
12/31/97 $13,076 1.72% $ 42,697 -1.87% $19,688
1/31/98 $12,480 1.11% $ 43,171 -0.13% $19,662
2/28/98 $13,145 7.21% $ 46,284 5.70% $20,783
3/31/98 $13,833 5.12% $ 48,653 4.22% $21,660
4/30/98 $14,371 1.01% $ 49,145 2.69% $22,243
5/31/98 $12,996 -1.72% $ 48,300 -2.12% $21,771
6/30/98 $12,107 4.06% $ 50,260 -2.77% $21,168
7/31/98 $10,793 -1.07% $ 49,723 -5.89% $19,921
8/31/98 $ 8,153 -14.46% $ 42,533 -13.63% $17,206
9/30/98 $ 9,792 6.41% $ 45,259 8.07% $18,595
10/31/98 $10,502 8.13% $ 48,939 5.13% $19,549
11/30/98 $ 9,781 6.06% $ 51,904 1.51% $19,844
12/31/98 $ 9,758 -0.24% 5.76% $ 54,894 -0.93% $19,659
</TABLE>
SMALL CAP FUND
In keeping with its philosophy, Small Cap Fund seeks growth at a reasonable
price. We look for companies with some competitive advantage, such as
intellectual property, barriers to market entry for competitors or a
faster-than-average growth trend. At the same time, we expect to pay a
reasonable price for that growth. We attempt to do this with portfolio
construction and stock selection based on bottom-up research from our equity
analysts who identify target buy and sell prices for the securities they follow.
The year under review was challenging for the small-cap world, with the small
cap market underperforming large caps by a significant amount. Small Cap Fund
returned -0.98% for the reporting period, slightly underperforming the Russell
2500
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
16
<PAGE>
Index's 0.38% return. However, the S&P 500 Index, which consists of 500 widely
held U.S. common stocks, returned 28.6%, reflecting investors' appetite for
large cap stocks.*
We cannot predict when small cap stocks will begin to outperform their larger
counterparts. However, it is worth noting that over the long term small cap
stocks have outperformed large caps. Normally if there are signs that the global
economy is beginning a new cyclical upturn, small caps tend to outperform the
market; we do not expect this to happen for at least six months. As of the end
of the reporting period signs of a slowing economy and significant risks
overseas persisted. Until these situations stabilize, we would not expect small
caps or value stocks to outperform the large-cap growth category. However, the
overall small-cap picture tends to obscure subcategories such as oil and gas,
which we believe are undervalued, and where the portfolio retains an overweight
position. We anticipate this area may deliver excellent returns in the next
couple of years, as we don't expect oil prices to stay this low forever. Our
growth at a reasonable price strategy influenced our purchase of some
economically sensitive stocks, including deepwater drillers, real estate
investment trusts (REITs) and semiconductor equipment manufacturers.
Technology services and electronic technology were our best-performing sectors
where we maintained a 38.4% weighting as of year-end. This group benefits from
the competitive advantages of intellectual property and continuous growth;
however, the sector can be quite volatile. Among technology companies, we see a
tremendous future specifically for data mining, which we expect to benefit from
large-scale corporate spending. This should be possible when Year 2000
expenditure is over, probably by late 1999. Data mining software enables
end-users to generate useful reports based on information in a database. One
example of this is access to real-time, instantaneous sales reporting, broken
down by region, product, broker and date.
The portfolio leveraged the data mining trend in direct and indirect ways. One
of our largest positions was in Documentum Inc., a leader in document management
software for corporations. Their product is especially useful to law firms and
pharmaceutical companies that must manage large amounts of data in text format.
Another favorite was Sapient Corp., a company that derives a large portion of
its revenues from providing Internet and intranet technology consulting
services. For fourth quarter 1998, Documentum and Sapient's earnings were about
50% and 30%, respectively. Another company we liked was Uniphase Corp., a leader
in laser technology used for dense wavelength division multiplexing (DWDM),
which increases carrying capacity for fiber-optic cable. Their fourth quarter
earnings were about 35% as of December 31, 1998.
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (13)
This chart shows the top 10 industry breakdown based on the percentage of total
net assets on 12/31/98 for the Small Cap Fund.
TOP 10 INDUSTRY BREAKDOWN
Small Cap Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------
<S> <C>
Electronic Technology 17.9%
Technology Services 20.5%
Finance 16.5%
Utilities 4.9%
Energy Minerals 4.0%
Transportation 3.8%
Industrial Services 3.6%
Consumer Services 3.6%
Health Technology 3.5%
Health Services 3.3%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
17
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (15)
This chart shows the average annual total return for the Small Cap Fund as of
12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------
<S> <C>
1-Year -0.98%
Since Inception (11/1/95) +14.51%
</TABLE>
- --------------------------------------------------------------------------------
Of course, future growth rates will vary, but we consider these figures as well
as other information in assessing a company's future prospects.
Although we cannot predict how small caps will perform against large caps, we
are very bullish on our prospects going forward.
TOTAL RETURN INDEX COMPARISON
Small Cap Fund
$10,000 Investment (11/1/95-12/31/98)
GRAPHIC MATERIAL (14)
This graph compares the performance of Small Cap Fund as tracked by the growth
in value of a $10,000 investment, to that of the S&P 500 and the Russell 2500
Index from 11/1/95-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
<TABLE>
<CAPTION>
SMALL CAP S&P500 RUSSELL 2500 INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
11/1/95 $10,000 $10,000 $10,000
11/30/95 $9,700 4.39% $10,439 4.27% $10,427
12/31/95 $10,230 1.93% $10,640 1.71% $10,605
1/31/96 $10,370 3.40% $11,002 0.71% $10,681
2/29/96 $10,850 0.93% $11,105 3.01% $11,002
3/31/96 $11,140 0.96% $11,211 2.04% $11,227
4/30/96 $12,250 1.47% $11,376 4.62% $11,745
5/31/96 $12,760 2.58% $11,669 2.71% $12,063
6/30/96 $12,154 0.38% $11,714 -3.07% $11,693
7/31/96 $11,054 -4.42% $11,196 -7.32% $10,837
8/31/96 $12,114 2.11% $11,432 5.75% $11,460
9/30/96 $12,654 5.63% $12,076 4.33% $11,957
10/31/96 $12,404 2.76% $12,409 -0.66% $11,878
11/30/96 $12,964 7.56% $13,347 4.83% $12,451
12/31/96 $13,204 -1.98% $13,083 1.37% $12,622
1/31/97 $13,494 6.25% $13,901 2.76% $12,970
2/28/97 $12,864 0.78% $14,009 -1.49% $12,777
3/31/97 $11,954 -4.11% $13,433 -4.53% $12,198
4/30/97 $12,034 5.97% $14,235 1.27% $12,353
5/31/97 $13,744 6.09% $15,102 9.21% $13,491
6/30/97 $14,269 4.48% $15,779 4.09% $14,043
7/31/97 $15,175 7.96% $17,035 5.86% $14,866
8/31/97 $15,330 -5.60% $16,081 1.39% $15,072
9/30/97 $16,813 5.48% $16,962 6.54% $16,058
10/31/97 $16,103 -3.34% $16,396 -4.49% $15,337
11/30/97 $15,721 4.63% $17,155 0.45% $15,406
12/31/97 $15,505 1.72% $17,450 1.89% $15,697
1/31/98 $15,443 1.11% $17,644 -1.53% $15,457
2/28/98 $16,659 7.21% $18,916 7.26% $16,579
3/31/98 $17,318 5.12% $19,884 4.39% $17,307
4/30/98 $17,565 1.01% $20,085 0.38% $17,373
5/31/98 $16,319 -1.72% $19,740 -4.64% $16,567
6/30/98 $16,327 4.06% $20,541 0.12% $16,586
7/31/98 $14,726 -1.07% $20,321 -6.87% $15,447
8/31/98 $11,269 -14.46% $17,383 -18.86% $12,534
9/30/98 $12,343 6.41% $18,497 7.10% $13,424
10/31/98 $13,149 8.13% $20,001 5.47% $14,158
11/30/98 $14,145 6.06% $21,213 4.95% $14,859
12/31/98 $15,353 8.54% 5.76% $22,435 6.06% $15,759
</TABLE>
TEMPLETON DEVELOPING MARKETS EQUITY FUND
The year under review was a test of faith for emerging markets investors. Early
1998 saw the renewal of currency stability in Asia, and a reduction of the
"Asian contagion" threat, a spreading of the Asian crisis, to other developing
markets. We feel the outlook for many emerging markets brightened over the short
term, as South Korea and other Asian countries restructured their long-term debt
and the International Monetary Fund (IMF) introduced aid packages. However,
Indonesia's political turmoil and Japan's currency crisis renewed concern about
the health of all emerging market economies.
While Asian countries were improving or at least stabilizing, Latin America
faced a tougher environment. Commodity prices, the driving force behind many
Latin American economies, continued to sink during the first half of 1998. The
Asian currency devaluations added to woes, increasing many investors' fears that
the Asian contagion would spread to the region and competition from cheaper
Asian products would grow. However, Latin America received at least one benefit
from the Asian crisis. Governments saw in Asia their possible future if they did
not make reforms. As a result, many Latin American governments stepped up their
privatization efforts and introduced reforms to boost government income. Toward
the end of the reporting period, most major Latin American markets were striking
a precarious balance between the negative factors abroad and more positive
domestic events.
The emerging markets crisis could well have ended as early as July 1998, if not
for Russia. In July, the IMF extended aid to the nation, despite its failed
attempt to revise
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
18
<PAGE>
the tax system and apparent lack of overall economic and corporate policy
improvement. Unfortunately, the extension did little to encourage the Russians
to undergo policy and practice amendments. In mid-August, the Russian central
bank, taking note of the country's deteriorating condition, announced a 90-day
moratorium on foreign debt repayment. At the same time, the central bank
announced it would restructure the domestic debt market, or GKO market, and
allow the ruble to devalue by 30%.
The international banking community appeared to view the events as the
expropriation of its investment dollars and in retaliation for the
restructuring, threatened to sue the Russian government and freeze Russian
assets. As of December, the banks and the Russian government had reportedly
reached a deal, but no details were yet available.
Speculation that the U.S. and leading European nations had a high degree of
exposure to the Russian economy, in our view, weakened the U.S. dollar and other
major currencies. This, in turn, created concerns that other emerging markets,
most notably Hong Kong, would undertake similar measures, renewing speculative
attacks on its currency. Sentiment toward emerging markets suffered immensely,
and in September, many emerging markets sank well below their lows of January
and June to near historically low levels.
We believe the effects of the Russian crisis, while at first overwhelmingly
negative, proved to have two long-term positives for emerging markets. First,
the weakness of major currencies, especially the U.S. dollar and the German
mark, helped those emerging markets with a high degree of U.S.
dollar-denominated foreign debt. The U.S. dollar fell against other major
currencies over the reporting period, thus resulting in a debt reduction for
many emerging markets. In addition, the U.S. dollar devaluation also
significantly increased the value of Japanese yen, making Japanese exports more
expensive than those of other Asian and Latin American countries and increasing
many emerging countries' competitiveness.
Second, the Russian crisis seemed to focus the international community on the
global economy's condition. When Malaysia announced unprecedented foreign
exchange restrictions locking foreign investors into the country, the U.S. and
other Group of Seven* nations acted. During the later part of the year, many
developed countries cut their prime rates, followed by some developing markets.
We think these cuts were the catalyst for the growth experienced during the last
quarter of 1998. Regional performances also improved partly due to the IMF's
offering of aid to Brazil, further appreciation of the yen against the U.S.
dollar and European adjustments prior to launching the euro.
GRAPHIC MATERIAL (16)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Developing Markets Equity Fund.
TOP 10 HOLDINGS
TEMPLETON DEVELOPING
MARKETS EQUITY FUND
12/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Telefonos de Mexico SA (Telmex), L, ADR 4.9%
Telecommunications, Mexico
Akbank 2.8%
Banking, Turkey
Centrais Eletricas Brasileiras SA (Electrobas 2.5%
Utilities Electrical & Gas, Brazil
Thai Farmers Bank Public Co. Ltd. 2.4%
Banking, Thailand
Cemex SA 2.3%
Building Materials & Components, Mexico
CEZ AS 1.7%
Utilities Electrical & Gas, Czech Republic
Cheung Kong Holdings Ltd. 1.5%
Multi-Industry, Hong Kong
New World Development Co. Ltd. 1.4%
Real Estate, Hong Kong
Compania De Telecomunicaciones
De Chile SA, ADR 1.4%
Telecommunications, Chile
Molinos Rio de la Plata SA, B 1.4%
Food and Household Products, Argentina
</TABLE>
- --------------------------------------------------------------------------------
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K., Italy and Canada.
19
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE MSCI WORLD INDEX WITH THE MSCI EMERGING MARKETS FREE INDEX.
BECAUSE THE NEW INDEX INCORPORATES ONLY EMERGING MARKETS SECURITIES THAT CAN BE
FREELY PURCHASED BY FOREIGNERS, WE BELIEVE IT BETTER MATCHES THE INVESTMENTS OF
THE FUND.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES
BUT DOES NOT INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE
ANNUITY AND LIFE INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF
THEY HAD BEEN INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT
PROSPECTUS FOR A COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES. INDEX SOURCES ARE MSCI AND THE INTERNATIONAL FINANCE
CORPORATION.
GRAPHIC MATERIAL (18)
This chart shows the average annual total return for the Templeton Developing
Markets Equity Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year -21.61%
3-Year -4.53%
Since Inception (3/15/94) -3.22%
</TABLE>
- --------------------------------------------------------------------------------
The emerging markets entered a crucial time in their development, when we felt
actions by individual governments would have long-lasting effects on emerging
market values. Flushed by the recent strength and individual markets' apparent
return to good standing with investors, local governments may find it difficult
to push through tough reforms necessary for continued growth. In addition, while
investor sentiment improved drastically over the past three months, the
improvement appeared to come principally from a handful of buyers. Strategic
investors continued to move into markets, seeking to acquire assets with huge
potential at bargain prices. This change in sentiment appears to indicate many
feel a bottom was reached. However, in the case of another correction, we are
concerned that it is not likely that many of these investors would wait until it
ran its course, but would rather take profit and wait out the slump, thereby
exacerbating the correction and watering down sentiment.
Within this environment, the portfolio performed favorably relative to its
benchmark, the MSCI Emerging Markets Free Index. During the year under review we
shifted our major weightings to favor Asia's more developed markets, Hong Kong
and Singapore, and those Asian markets we expect to recover the quickest,
Thailand and Korea. We positioned the portfolio in an effort to maximize these
markets' returns based on our anticipation of a sustained recovery. Looking
ahead, we continue to be optimistic about the future performance of
emerging-market investments, despite significant risks. The threat of slowing
reform and a short-term correction remain; however, over the long term,
competition between foreign and domestic investors may drive demand and prices
higher. In addition, the increasing activity of strategic multinational
investors may boost demand for equities and add stability in general. Add to the
mix the growing number of investors bargain hunting for assets, and the
competition has the potential to become more intense over the longer term. Of
course, there are still potential problems, such as hedge funds pulling out and
government intervention. However, we feel their effects would probably be
relatively short-term and only serve to mask the actual growth being achieved by
individual companies. It is this individual growth from which we expect to
capitalize well into the future.
TOTAL RETURN INDEX COMPARISON
Templeton Developing Markets Equity Fund
$10,000 Investment (3/15/94-12/31/98)
Food and Household Products, Argentina
GRAPHIC MATERIAL (17)
This graph compares the performance of Templeton Developing Markets Equity Fund
as tracked by the growth in value of a $10,000 investment, to that of the MSCI
World Index, MSCI Emerging Markets Free Index, and IFC Investable Composite
Index from 3/15/94-12/31/98.
We are replacing the MSCI World Index with the MSCI Emerging Markets Free Index.
Because the new index incorporates only emerging markets securities that can be
freely purchased by foreigners, we believe it better matches the investments of
the fund.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index sources are MSCI and the International Finance Corporation.
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING MSCI WORLD INDEX MSCI EMERGING IFC INVESTABLE
MARKETS EQUITY FUND MARKETS FREE INDEX COMPOSITE INDEX
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/15/94 $10,000 $10,000 $10,000 $10,000
3/31/94 $10,000 $ 9,774 $ 9,512 $ 9,452
4/30/94 $10,060 $10,078 $ 9,321 $ 9,272
5/31/94 $10,040 $10,105 $ 9,640 $ 9,491
6/30/94 $9,990 $10,079 $ 9,375 $ 9,154
7/31/94 $10,250 $10,272 $ 9,958 $ 9,811
8/31/94 $10,530 $10,583 $11,193 $11,073
9/30/94 $10,520 $10,307 $11,321 $11,347
10/31/94 $10,410 $10,602 $11,116 $10,972
11/30/94 $10,000 $10,144 $10,538 $10,551
12/31/94 $ 9,560 $10,245 $ 9,692 $ 9,434
1/31/95 $ 8,910 $10,093 $ 8,661 $ 8,173
2/28/95 $ 8,780 $10,242 $ 8,439 $ 8,067
3/31/95 $ 9,150 $10,737 $ 8,492 $ 8,052
4/30/95 $ 9,540 $11,114 $ 8,873 $ 8,385
5/31/95 $ 9,800 $11,211 $ 9,345 $ 8,698
6/30/95 $ 9,855 $11,210 $ 9,373 $ 8,749
7/31/95 $10,438 $11,773 $ 9,583 $ 9,028
8/31/95 $10,167 $11,513 $ 9,358 $ 8,786
9/30/95 $10,096 $11,850 $ 9,313 $ 8,722
10/31/95 $ 9,735 $11,666 $ 8,957 $ 8,391
11/30/95 $ 9,664 $12,073 $ 8,797 $ 8,349
12/31/95 $ 9,825 $12,428 $ 9,187 $ 8,639
1/31/96 $10,880 $12,655 $ 9,840 $ 9,375
2/29/96 $10,659 $12,734 $ 9,684 $ 9,156
3/31/96 $10,860 $12,949 $ 9,759 $ 9,290
4/30/96 $11,222 $13,255 $10,149 $ 9,662
5/31/96 $11,382 $13,269 $10,104 $ 9,580
6/30/96 $11,390 $13,339 $10,167 $ 9,693
7/31/96 $10,782 $12,870 $ 9,472 $ 9,056
8/31/96 $10,957 $13,021 $ 9,715 $ 9,336
9/30/96 $11,194 $13,533 $ 9,799 $ 9,474
10/31/96 $11,184 $13,629 $ 9,538 $ 9,271
11/30/96 $11,617 $14,396 $ 9,697 $ 9,408
12/31/96 $11,947 $14,168 $ 9,741 $ 9,449
1/31/97 $12,833 $14,340 $10,406 $10,117
2/28/97 $13,214 $14,508 $10,851 $10,611
3/31/97 $12,957 $14,224 $10,566 $10,350
4/30/97 $13,101 $14,691 $10,585 $10,174
5/31/97 $13,730 $15,601 $10,888 $10,519
6/30/97 $14,275 $16,381 $11,471 $10,974
7/31/97 $14,826 $17,138 $11,642 $11,084
8/31/97 $13,449 $15,994 $10,160 $ 9,669
9/30/97 $14,243 $16,865 $10,442 $ 9,976
10/31/97 $11,573 $15,980 $ 8,729 $ 8,343
11/30/97 $10,958 $16,266 $ 8,410 $ 7,943
12/31/97 $10,905 $16,466 $ 8,613 $ 8,057
1/31/98 $ 9,951 $16,928 $ 7,937 $ 7,526
2/28/98 $11,032 $18,076 $ 8,766 $ 8,294
3/31/98 $11,499 $18,842 $ 9,146 $ 8,619
4/30/98 $11,636 $19,029 $ 9,046 $ 8,641
5/31/98 $ 9,877 $18,793 $ 7,807 $ 7,564
6/30/98 $ 8,932 $19,242 $ 6,988 $ 6,793
7/31/98 $ 8,981 $19,214 $ 7,209 $ 7,061
8/31/98 $ 6,631 $16,654 $ 5,125 $ 5,076
9/30/98 $ 7,088 $16,952 $ 5,450 $ 5,317
10/31/98 $ 8,152 $18,487 $ 6,024 $ 5,933
11/30/98 $ 8,895 $19,590 $ 6,525 $ 6,379
12/31/98 $ 8,548 $20,550 $ 6,430 $ 6,281
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Total Return -14.52% 105.50% -35.70% -37.19%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
20
<PAGE>
TEMPLETON GLOBAL GROWTH FUND
For global investors, 1998 was a year of extreme volatility. During the summer,
the crisis that began in Asia spread to other emerging markets. Russia, in
particular, with its precarious debt-financing needs, came under tremendous
pressure, declared a moratorium on debt service and ultimately devalued its
currency, the ruble, seeking some stability. These developments, among other
factors, negatively influenced other developing markets, especially those in
Latin America.
Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth with little threat of
inflation. The U.S. economic expansion continued for the sixth consecutive year,
while unemployment fell to levels not seen since the early 1970s. Many European
economies also emerged from a sluggish growth environment to post impressive
economic gains. In particular, smaller European economies, such as Finland,
Spain and the Netherlands, began to expand quite rapidly during the year, as the
delayed impact of low, long-term interest rates stimulated economic activity. By
the end of the reporting period, accelerating economic growth spread to the
larger European economies of Germany, France and Italy.
Japan was a notable exception. Approximately nine years after the Japanese stock
market bubble burst, Japanese banks were still hampered by an enormous amount of
bad debt. During the year under review, government policy-makers appeared unable
to craft a solution to Japan's banking and economic woes. At the end of the
reporting period, Japan remained in a recession and in our view had little
near-term prospects of moving again into positive growth territory. We believe
Japan's ongoing troubles contributed greatly to the emerging markets crisis. The
yen's persistent weakness and the country's poor domestic demand for exports
from other Asian markets put enormous pressure on developing Asian economies.
We sought to take advantage of the market volatility by buying out-of-favor
securities during periods of investor pessimism and selling securities that we
felt had reached their full value. In early 1998, we began to take profits in
several continental European companies, which we felt reached extreme valuations
on a historical basis. We slightly decreased our U.S. holdings as well, from
about 23% of total net assets on December 31, 1997, to 21.1% at the end of the
reporting period, because we felt value was difficult to find there. In general,
we redeployed these assets into companies we considered undervalued, many
located in the U.K., Asia and Latin America. Two important purchases during the
year were U.K.-based General Electric Co. Plc. and Mexico-based diversified
industrial company Industrias Penoles SA.
- --------------------------------------------------------------------------------
[PIE CHART]
GRAPHIC MATERIAL (19)
This chart shows in pie format the geographic distribution of the Templeton
Global Growth Fund Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton Global Growth Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 38.7%
North America 24.8%
Asia 19.6%
Latin America 6.1%
Australia/New Zealand 3.7%
Africa 0.9%
Short-term Investments & Other Net Assets 6.2%
</TABLE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (20)
This chart shows the cop 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Global Growth Fund.
TOP 10 HOLDINGS
Templeton Global Growth Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
Electrabel SA 2.4%
Utilities Electrical & Gas, Belgium
Zurich Allied AG 1.9%
Insurance, Switzerland
Iberdrola SA, Br 1.9%
Utilities Electrical & Gas, Spain
Axa-UAP 1.8%
Financial Services, France
Danzas Holding AG 1.7%
Transportation, Switzerland
Pharmacia & Upjohn Inc. 1.7%
Health & Personal Care, U.S.
National Grid Group Plc. 1.6%
Utilities Electrical & Gas, U.K
Raytheon Co., A 1.5%
Aerospace & Military Technology, U.S.
Swire Pacific Ltd., A & B 1.5%
Multi-Industry, Hong Kong
Hutchison Whampoa Ltd. 1.4%
Multi-Industry, Hong Kong
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE MSCI WORLD INDEX WITH THE MSCI ALL COUNTRIES WORLD FREE
INDEX. BECAUSE THE NEW INDEX INCLUDES BOTH DEVELOPED AND EMERGING MARKETS, WE
BELIEVE IT BETTER MATCHES THE INVESTMENTS OF THE FUND. PERFORMANCE SHOWN IN THE
GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT INCLUDE ANY FEES,
CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE INSURANCE CONTRACTS
THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN INCLUDED, PERFORMANCE
WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A COMPLETE DESCRIPTION OF
THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES CHARGES. INDEX SOURCE IS
MSCI.
GRAPHIC MATERIAL (22)
This chart shows the average annual total return for the Templeton Global
Growth Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------------------------
<S> <C>
1-Year +8.98%
3-Year +14.48%
Since Inception (3/15/94) +12.30%
</TABLE>
- --------------------------------------------------------------------------------
Finding potential value in Asia, we increased our weighting there, from 8.9% of
the portfolio's total net assets at the beginning of the year to 19.6% on
December 31, 1998. Believing the Hong Kong market to be particularly attractive,
we increased our holdings from 3.88% to 9.1% of total net assets during the same
period. The most significant purchase during the period was Hutchison Whampoa
Ltd., one of Hong Kong's largest conglomerates, with interests ranging from
telecommunications, to retail, to ports, to infrastructure investment in China.
The management has consistently been able to unlock value for shareholders, and
we were able take a position at a sizeable discount to its net asset value. In
our opinion, the purchase price gave no account for the future growth potential
of the company's investments in Hong Kong, China or the U.K.
Unfortunately, our investments in Hong Kong and other emerging markets hurt our
recent performance. However, while we think share prices in Asia and much of the
emerging markets already sell at levels that discount the problems of falling
asset prices and tighter liquidity, many stocks in parts of Europe and the U.S.
are still buoyed by unrealistically high expectations, in our opinion. For a
long-term investor who can afford to be patient, we believe risk is minimized by
investing where expectations are already low and where share prices are
supported by value, not by momentum. Such thinking encouraged us to increase the
fund's weighting in Hong Kong, and in Asia generally.
We are confident that thorough research and focusing on value as opposed to
outlooks or trends will enhance returns over the long term. Although we are not
able to predict where the market will go next week, next month or next year, we
have a time-tested process of identifying securities that we believe are selling
at the lowest prices in relation to their long-term earnings potential or asset
value. Using our value-oriented philosophy, we believe volatility presents
opportunity, allowing us to continue implementing our value investment
discipline that historically has provided superior, long-term investment
results.
GRAPHIC MATERIAL (21)
This graph compares the performance of Templeton Global Growth Fund as tracked
by the growth in value of a $10,000 investment, to that of the MSCI World Index
and the MSCI AC World Free Index from 3/15/94-12/31/98.
We are replacing the MSCI World Index with the MSCI All Countries World Free
Index. Because the new index includes both developed and emerging markets, we
believe it better matches the investments of the fund.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is MSCI.
TOTAL RETURN INDEX COMPARISON
Templeton Global Growth Fund
$10,000 Investment (3/15/94 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON GLOBAL MSCI AC
GROWTH FUND MSCI WORLD INDEX WORLD FREE INDEX
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3/15/94 $10,000 $10,000 $10,000
3/31/94 $10,030 $9,774 $9,763
4/30/94 $10,079 $10,077 $10,028
5/31/94 $10,118 $10,105 $10,088
6/30/94 $10,020 $10,079 $10,039
7/31/94 $10,295 $10,272 $10,261
8/31/94 $10,551 $10,583 $10,626
9/30/94 $10,482 $10,307 $10,377
10/31/94 $10,492 $10,602 $10,643
11/30/94 $10,285 $10,144 $10,180
12/31/94 $10,315 $10,245 $10,216
1/31/95 $10,226 $10,093 $10,008
2/28/95 $10,335 $10,242 $10,115
3/31/95 $10,335 $10,737 $10,578
4/30/95 $10,630 $11,114 $10,963
5/31/95 $10,896 $11,211 $11,084
6/30/95 $11,053 $11,209 $11,087
7/31/95 $11,498 $11,773 $11,623
8/31/95 $11,399 $11,512 $11,368
9/30/95 $11,617 $11,850 $11,681
10/31/95 $11,231 $11,666 $11,486
11/30/95 $11,310 $12,073 $11,847
12/31/95 $11,627 $12,428 $12,204
1/31/96 $12,132 $12,655 $12,475
2/29/96 $12,181 $12,734 $12,527
3/31/96 $12,379 $12,949 $12,720
4/30/96 $12,706 $13,255 $13,031
5/31/96 $12,894 $13,269 $13,044
6/30/96 $12,886 $13,339 $13,116
7/31/96 $12,416 $12,870 $12,626
8/31/96 $12,814 $13,021 $12,782
9/30/96 $12,988 $13,533 $13,254
10/31/96 $13,080 $13,629 $13,307
11/30/96 $13,672 $14,396 $14,018
12/31/96 $14,102 $14,168 $13,815
1/31/97 $14,510 $14,340 $14,047
2/28/97 $14,592 $14,508 $14,238
3/31/97 $14,561 $14,224 $13,953
4/30/97 $14,623 $14,691 $14,402
5/31/97 $15,287 $15,601 $15,261
6/30/97 $16,058 $16,381 $16,042
7/31/97 $16,684 $17,138 $16,767
8/31/97 $16,246 $15,994 $15,591
9/30/97 $17,164 $16,865 $16,422
10/31/97 $15,891 $15,980 $15,444
11/30/97 $15,839 $16,265 $15,681
12/31/97 $16,006 $16,466 $15,887
1/31/98 $15,912 $16,928 $16,236
2/28/98 $17,185 $18,076 $17,347
3/31/98 $18,103 $18,842 $18,087
4/30/98 $18,155 $19,029 $18,257
5/31/98 $17,644 $18,793 $17,910
6/30/98 $17,395 $19,242 $18,233
7/31/98 $17,407 $19,213 $18,239
8/31/98 $14,891 $16,654 $15,684
9/30/98 $14,998 $16,952 $15,996
10/31/98 $16,391 $18,487 $17,456
11/30/98 $17,135 $19,590 $18,516
12/31/98 $17,442 $20,550 $19,376
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Return 74.42% 105.50% 93.76%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
22
<PAGE>
TEMPLETON INTERNATIONAL EQUITY FUND
Templeton International Equity Fund ended 1998 with a +5.56% one-year cumulative
total return, compared with the MSCI All Country World ex-U.S. Free Index, which
returned 14.46% during the same period.* This disappointing performance largely
reflects most investors' preference for a narrow range of large and expensive
stocks in 1998, versus the bargain-priced, often smaller and mid-size stocks in
which the portfolio typically invests. Additionally, our exposure to Latin
American stocks undercut performance, as all of that region's markets suffered
declines in 1998. Conversely, the developed stock markets continued on a
record-breaking pace during the year, even in the face of weak earnings trends
and signs of global economic weakness. Given the high valuations in developed
markets, perilous economic conditions in many emerging markets and rising
concerns regarding the earnings outlook for many companies, the portfolio
maintained a larger than normal cash position during 1998. Although this helped
during the weak markets in the late summer and fall, for the year as a whole it
contributed to the portfolio's underperformance relative to the MSCI All Country
World ex-U.S. Free Index.
Asia's economic troubles, which began in 1997 and continued into 1998, had an
important influence on the course of global stock and bond markets during the
year. Many investors evidently sought to flee the uncertainty in the Asian stock
markets, in favor of company investments with a low probability for earnings
disappointments. As such companies infrequently met our strict value criteria,
Templeton's bargain-hunting investment style fell out of favor. This was nowhere
more obvious than in the soaring technology and Internet stocks in the U.S. and
Europe. Despite valuation levels that, in many cases, seemed out of touch with
the earnings power of these companies, their share prices continued to rise.
Left behind were many fine companies, which we think have solid, long-term
prospects for earnings growth and much lower valuations. Your portfolio
consisted of many such stocks, and we are confident that the market will
eventually recognize the value they represent.
After Russia's loan default and currency devaluation in late summer, investors
appeared to become concerned that Brazil and Venezuela might also encounter
repayment difficulties. Despite the fact that Latin America's share prices were
among the world's lowest, selling pressure in these markets became intense. The
portfolio's exposure to Brazil, in particular, and Latin America, in general,
weighed heavily on its performance. We remain confident that the stocks we hold
in this region ultimately
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (23)
This charts shows in bar format the geographic distribution of the Templeton
International Equity Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton International Equity Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 68.7%
Latin America 8.6%
Australia/New Zealand 4.1%
North America 3.8%
Asia 2.8%
Mid-East/Africa 0.9%
Short-term investments & other net assets 11.1%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
23
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS BOOK VALUE?
Book value is the total net asset value of a company's securities calculated by
using the following formula: Total assets minus intangible assets, minus current
liabilities, minus any long-term liabilities and equity issues that have a prior
claim equals total net assets available for payment of the issue under
consideration.
Barron's Dictionary of Finance and Investment Terms, 1995.
- --------------------------------------------------------------------------------
should yield strong returns as investors begin to appreciate the unusually
attractive bargains available in these shares. Many Brazilian stocks we held
traded at single-digit price/earnings (P/E) multiples and below book value at
the end of the reporting period. This compared with valuations in the developed
world of mid-20s P/Es and 4-7 times book value. Additionally, these companies
have strong balance sheets and, in our opinion, are well-positioned to take
advantage of any short-term economic weakness to build long-term shareholder
value.
We found it more difficult to find attractive long-term values in many of the
Asian markets. Although it appeared that some of these economies had begun to
reach their low points, the damage done to the banking and corporate sectors
will take much time and money to repair. In particular, we were concerned that
many companies would begin to see improving sales and operating earnings in the
1999-2000 time period, but that earnings per share would not recover as much as
many analysts hoped, due to the need for new, diluting equity issues to repair
weakened balance sheets. Moreover, continued economic problems in Japan and
China could pose additional challenges for the region going forward.
Accordingly, we maintained a low weighting in Asia and added only strongly
capitalized companies like Hong Kong Telecommunications Ltd. to the portfolio.
We suspect that better bargains will emerge in Asia as the recapitalization
process moves forward. Furthermore, most Asian stocks and currencies already
rebounded sharply from the lows reached earlier in 1998 and, at valuations as of
the end of the reporting period, did not appear to take into account the large
number of potential equity issues and the earnings dilution they may cause over
the longer term.
Looking forward into 1999, we will be seeking opportunities to put the
portfolio's cash reserves to work in truly bargain-priced stocks while
maintaining an appropriate degree of diversification. This is an arduous task
when many of the world's stock markets are already trading at record levels.
Given the valuation dichotomy between large and small stocks, as well as between
growth and value shares seen in the market today, risk appeared greater in those
stocks that have performed well already, especially since investors seemed to be
significantly downplaying signs of global economic weakness and deflation. As
demonstrated by Templeton International Equity Fund's 1998 performance, we hold
few shares that fit into this momentum category. Accordingly, while any foreign
stock fund may be volatile, we believe that the fund may be somewhat insulated
from a pullback in the large, growth stocks should investors' very high
expectations for these shares be disappointed. As always, the Templeton research
24
<PAGE>
team will be scouring the world for those shares whose prices are selling at the
lowest value relative to their future earnings potential, since such shares help
reduce risk while offering the potential for attractive long-term returns.
GRAPHIC MATERIAL (24)
This graph compares the performance of Templeton International Equity Fund as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country World Ex-U.S. Free Index from 1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is MCSI.
TOTAL RETURN INDEX COMPARISON
Templeton International Equity Fund
$10,000 Investment (1/27/92 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL MSCI AC WORLD EX
EQUITY FUND U.S. FREE INDEX
- -------------------------------------------------------------------------------------
<S> <C> <C>
1/27/92 $10,000 $10,000
1/31/92 $10,000 $9,982
2/29/92 $10,000 $9,675
3/31/92 $10,000 $9,090
4/30/92 $10,010 $9,120
5/31/92 $10,270 $9,674
6/30/92 $10,040 $9,207
7/31/92 $9,760 $9,011
8/31/92 $9,860 $9,492
9/30/92 $9,740 $9,297
10/31/92 $9,570 $8,889
11/30/92 $9,670 $8,938
12/31/92 $9,760 $9,012
1/31/93 $9,630 $9,011
2/28/93 $9,770 $9,287
3/31/93 $9,930 $10,052
4/30/93 $10,200 $10,940
5/31/93 $10,410 $11,183
6/30/93 $10,218 $11,049
7/31/93 $10,419 $11,417
8/31/93 $11,132 $12,029
9/30/93 $11,042 $11,782
10/31/93 $11,694 $12,208
11/30/93 $11,403 $11,279
12/31/93 $12,547 $12,158
1/31/94 $13,461 $13,158
2/28/94 $13,230 $13,059
3/31/94 $12,748 $12,461
4/30/94 $12,868 $12,883
5/31/94 $12,939 $12,888
6/30/94 $12,601 $12,979
7/31/94 $13,117 $13,190
8/31/94 $13,512 $13,634
9/30/94 $13,249 $13,296
10/31/94 $13,466 $13,654
11/30/94 $12,889 $12,995
12/31/94 $12,656 $12,965
1/31/95 $12,393 $12,377
2/28/95 $12,576 $12,309
3/31/95 $12,535 $13,004
4/30/95 $13,091 $13,512
5/31/95 $13,334 $13,452
6/30/95 $13,629 $13,266
7/31/95 $14,207 $14,019
8/31/95 $13,902 $13,533
9/30/95 $14,207 $13,764
10/31/95 $13,797 $13,396
11/30/95 $13,829 $13,711
12/31/95 $13,997 $14,253
1/31/96 $14,470 $14,449
2/29/96 $14,806 $14,449
3/31/96 $15,037 $14,718
4/30/96 $15,478 $15,165
5/31/96 $15,699 $14,937
6/30/96 $15,720 $15,013
7/31/96 $15,241 $14,514
8/31/96 $15,698 $14,732
9/30/96 $15,854 $14,961
10/31/96 $16,143 $14,812
11/30/96 $16,756 $15,383
12/31/96 $17,213 $15,205
1/31/97 $17,514 $14,926
2/28/97 $17,792 $15,199
3/31/97 $18,048 $15,167
4/30/97 $17,892 $15,295
5/31/97 $18,572 $16,240
6/30/97 $19,594 $17,136
7/31/97 $20,107 $17,483
8/31/97 $19,690 $16,108
9/30/97 $21,085 $16,979
10/31/97 $19,666 $15,533
11/30/97 $19,201 $15,339
12/31/97 $19,225 $15,516
1/31/98 $19,105 $15,980
2/28/98 $20,310 $17,046
3/31/98 $21,645 $17,635
4/30/98 $22,182 $17,761
5/31/98 $22,027 $17,439
6/30/98 $21,798 $17,374
7/31/98 $21,889 $17,539
8/31/98 $18,607 $15,065
9/30/98 $18,123 $14,747
10/31/98 $19,339 $16,292
11/30/98 $20,189 $17,167
12/31/98 $20,294 $17,759
</TABLE>
<TABLE>
<S> <C> <C>
Total Return 102.94% 77.59%
</TABLE>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
Templeton International Smaller Companies Fund had a cumulative total return of
- -12.27% for the year ended December 31, 1998. This compared to a 1.26% return
for the Salomon Global ex-U.S. less than U.S. $1 billion Index.* We attribute
our underperformance versus the index to several factors. In January, Hong Kong
performed very poorly relative to other Asian markets, severely dampening the
portfolio. During the period, the portfolio was oriented to cyclical stocks,
reflecting the nature of the bargain list. Also, many higher-valued, better
quality companies among the small-cap sector were beyond our identified price
range, and such companies tended to perform best.
As of December 31, 1998, the portfolio had approximately $25 million in assets
under management, invested in 33 countries. The pie chart shows the largest
positions by geographic area: Europe with 55.5%, Asia with 19.4%, and Latin
America with 6.0%. By country, the largest positions were 16.2% in the U.K.,
9.4% in Hong Kong, and 8% each in Spain and the Netherlands.
The past year proved challenging for investors in international small-cap
stocks. Larger-capitalization equities captured the bulk of investor attention,
outperforming small-cap stocks by a large margin during a period of significant
volatility. The weak
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS MSCI.
GRAPHIC MATERIAL (25)
This chart shows the average annual total return for the Templeton International
Equity Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------
<S> <C>
1-Year +5.56%
5-Year +10.09%
Since Inception (1/27/92) +10.75%
</TABLE>
GRAPHIC MATERIAL (26)
This chart shown in pie format the geographic distribution of the Templeton
International Smaller Companies Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton International
Smaller Companies Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 55.5%
Asia 19.4%
Latin America 6.0%
North America 5.8%
Australia/New Zealand 4.7%
Mid-East/Africa 2.6%
Short-term Investments & Other Net Assets 6.0%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
25
<PAGE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (27)
This table shows the forecasted 1999 P/E Ratios of several countries.
FORECASTED 1999 P/E RATIOS*
<TABLE>
<CAPTION>
SMALL COMPANIES LARGE COMPANIES
- ---------------------------------------------------------------------
<S> <C> <C>
Brazil 5 8
Canada 19 16
France 14 21
Germany 15 22
Hong Kong 7 14
Japan 24 34
Mexico 6 16
Netherlands 9 23
Spain 15 21
Sweden 13 20
Switzerland 13 20
United Kingdom 11 20
</TABLE>
*Source: Salomon Smith Barney.
- --------------------------------------------------------------------------------
performance of small caps did not necessarily result from profit disappointment;
rather, we feel it was a consequence of money flowing principally to each
market's leading companies. As a result, there generally was a large disparity
in valuations between small- and large-cap stocks, with smaller companies often
trading at unusually wide discounts to larger companies in world markets. Our
analysts sought to take advantage of this trend to uncover fundamentally sound,
attractive businesses, selling at less than intrinsic value.
Europe continued to be our largest geographic exposure during 1998. Most
European equity markets appreciated sharply during the year, shrugging off
well-documented problems in Russia and reduced earnings expectations for many
companies. Small-cap stocks, however, largely failed to participate in this
strong performance and generally lagged behind large caps in trends toward
restructuring, cost-efficiency and increased attention to shareholder value.
Nevertheless, as of the end of the reporting period, we believed many European
smaller companies were beginning to take a more active approach toward cost
cutting and improved efficiency, and as a result, our outlook for shares of
European small caps was bright. Somerfield Plc., a U.K. supermarket and one of
the portfolio's largest holdings, is an example of a stock we purchased for the
portfolio at attractive valuations that benefited from the above trends.
Somerfield historically has been an inexpensive stock, with this valuation
justified by skepticism about its management's ability to increase profitability
amid competitive pressures from larger supermarkets. However, after meeting with
Somerfield management, our analysts determined that the company was poised to
reward investors by increasing profitability through cost reduction.
Somerfield's leading position in the high-end supermarket segment also made it
an attractive merger and acquisition candidate, which is exactly what occurred
in February. Kwik Save Group Plc., a large U.K. food retailer, announced a
merger with Somerfield, propelling the company into the spotlight as a premier
industry competitor.
Asia's economic woes, caused in part by last year's widespread currency
devaluations, compounded during the first half of 1998, before signs of recovery
emerged toward year-end in the form of lower interest rates, strengthening
currencies and growing surpluses in many countries. Responding to the effects of
currency devaluation, many regional governments were compelled to make difficult
policy decisions to force economic reform. In Hong Kong, the Hong Kong Monetary
Authority, backed by almost $100 billion in currency reserves, reportedly
purchased equities to defend the country's capital markets and the Hong Kong
dollar exchange rate from speculators. Although this intervention evidently
discouraged short-sellers from attacking the peg and significantly propped up
the stock market, international investors appeared to remain concerned about the
potential consequences of large-scale government equity holdings. The
portfolio's Hong Kong holdings remain restricted to those companies
26
<PAGE>
with proven management track records, strong balance sheets, minimal property
exposure and stable earnings. One such example is Li & Fung Ltd., which we found
to have a realistic strategy, a very strong balance sheet and a highly
sophisticated, forward-thinking management team. The company manages
manufacturing programs, such as virtual factories, for firms that produce
labor-intensive consumer goods like clothing. We purchased shares of Li & Fung
at a price beneath our assessment of its intrinsic value, believing it is a
flexible and efficient company that should continue to grow through acquisition
and expansion into new markets.
We continued to have difficulty finding value in Japan, where the average
company traded at a rich 31 times 1999 projected earnings as of the end of the
reporting period. This valuation compared with other Asian markets where the
price-to-earnings ratios ranged from 12.26 to 30.53. Although the Japanese stock
market represents over 21% of the world's market capitalization outside the
U.S., less than 3% of the portfolio's total net assets were invested in Japan on
December 31, 1998, because of these high valuations. Overall, we would expect to
see the portfolio's weighting in Japan increase if the new government addresses
the economy's structural problems and companies begin to provide greater
financial disclosure and focus on creating value for shareholders.
Looking ahead into 1999, we expect continued recovery throughout Asia, with a
slow and uneven pace across countries. We would seek to take advantage of the
likely stock price volatility to add to high-quality, Pacific Rim companies in
countries that are selling beneath our assessment of their intrinsic value.
The problems in Russia and the uncertainties in Asia appeared to have
repercussions in Latin America. In Brazil, markets declined sharply and capital
reportedly left the country. As money flowed out of Brazil, the central bank was
forced to defend its currency via high, short-term interest rates. This caused
severe problems for Brazil's already high fiscal deficit and drove speculation
the country would devalue its currency. An example of a Latin American small cap
we added to the portfolio was Fertilizantes Fosfatados SA, Pfd., Brazil's
leading producer of fertilizer. We think the stock had a strong financial
position as of year-end, offering a 10% dividend yield and trading at under four
times our 1999 earnings estimates.
Regarding our long-term strategy, while the sharp fall-off in many world markets
hurt short-term stock performance, investors did not always differentiate
between those companies with significant exposure to the problem areas, and
those without. This gave Templeton International Smaller Companies Fund the
opportunity to selectively add high-quality stocks, particularly in Europe and
Asia, at what we feel were attractive prices. While foreign small-cap stocks may
be volatile, we believe the portfolio's longer-term performance should benefit
from this value-oriented approach.
GRAPHIC MATERIAL (28)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
International Smaller Companies Fund.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
Templeton International Smaller Companies Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Sa des Galeries Lafayette 3.5%
Merchandising, France
GTC Transcontinental Group Ltd., B 2.5%
Broadcasting & Publishing, Canada
VTech Holdings Ltd. 2.4%
Electric Components & Instruments, Hong Kong
Gas Y Electricidad SA, Br. 2.3%
Utilities Electrical & Gas, Spain
Hazlewood Foods Plc. 2.2%
Food & Household Products, U.K.
Somerfield Plc. 2.2%
Merchandising, U.K.
Dragados Y Construcciones SA, Br. 2.1%
Construction & Housing, Spain
Banco Pastor SA 2.0%
Banking, Spain
Li & Fung Ltd. 2.0%
Merchandising, Hong Kong
Moebel Walther AG & Pfd. 1.8%
Merchandising, Germany
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE SALOMON WORLD EX-U.S. EXTENDED MARKET INDEX WITH THE
SALOMON GLOBAL EX-U.S. LESS THAN $1 BILLION INDEX. THE NEW INDEX INCLUDES ALL
DEVELOPED AND EMERGING COUNTRIES, EXCEPT THE U.S., AND INCLUDES COMPANIES WITH A
TOTAL MARKET CAPITALIZATION BELOW U.S. $1 BILLION. WE BELIEVE IT BETTER MATCHES
THE PORTFOLIO'S INVESTMENTS.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS SALOMON SMITH BARNEY.
GRAPHIC MATERIAL (30)
This chart shows the average annual total return for the Templeton
International Smaller Companies Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year -12.27%
Since Inception (5/1/96) -1.06%
</TABLE>
- --------------------------------------------------------------------------------
We take very seriously the trust you place in us to invest your money, and go to
great lengths to assess what we believe to be each company's true value before
we buy its shares for your portfolio. Our analysts attempt to determine a
company's value by estimating its potential earnings well into the future. By
focusing on the long term, we are often able to buy what others are selling
based on short-term considerations. We believe that this approach, while
requiring patience, has the potential to reward investors.
GRAPHIC MATERIAL (29)
This graph compares the performance of Templeton International Smaller Companies
Fund as tracked by the growth in value of a $10,000 investment, to that of the
Salomon Global ex-U.S. less than $1 Billion Index and the Salomon World ex-U.S.
EMI from 5/1/96-12/31/98.
We are replacing the Salomon World ex-U.S. Extended Market Index with the
Salomon Global ex-U.S. less than $1 billion Index. The new index includes all
developed and emerging countries, except the U.S., and includes companies with a
total market capitalization below US $1 billion. We believe it better matches
the portfolio's investments.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sale
charges. Index source is Salomon Smith Barney.
TOTAL RETURN INDEX COMPARISON
Templeton International Smaller Companies Fund
$10,000 Investment (5/1/96 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL SMALLER SALOMON GLOBAL EX-U.S. SALOMON WORLD EX-U.S.
COMPANIES FUND LESS THAN $1 BILLION INDEX EMI INDEX
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,150 $ 9,929 $ 9,922
6/30/96 $10,330 $ 9,908 $ 9,923
7/31/96 $10,210 $ 9,465 $ 9,548
8/31/96 $10,330 $ 9,637 $ 9,644
9/30/96 $10,410 $ 9,694 $ 9,698
10/31/96 $10,690 $ 9,704 $ 9,660
11/30/96 $10,890 $ 9,890 $ 9,819
12/31/96 $11,250 $ 9,721 $ 9,638
1/31/97 $11,330 $ 9,791 $ 9,430
2/28/97 $11,450 $ 10,022 $ 9,588
3/31/97 $11,490 $ 9,803 $ 9,461
4/30/97 $11,440 $ 9,611 $ 9,320
5/31/97 $11,670 $10,127 $ 9,917
6/30/97 $11,936 $10,341 $10,141
7/31/97 $12,026 $10,188 $ 9,988
8/31/97 $12,117 $ 9,652 $ 9,562
9/30/97 $12,569 $ 9,672 $ 9,732
10/31/97 $11,574 $ 9,092 $ 9,347
11/30/97 $11,232 $ 8,426 $ 8,930
12/31/97 $11,081 $ 8,170 $ 8,733
1/31/98 $10,689 $ 8,345 $ 9,097
2/28/98 $11,684 $ 9,047 $ 9,776
3/31/98 $12,227 $ 9,364 $10,235
4/30/98 $12,328 $ 9,396 $10,313
5/31/98 $12,066 $ 9,206 $10,505
6/30/98 $11,327 $ 8,739 $10,198
7/31/98 $11,105 $ 8,552 $10,128
8/31/98 $ 9,362 $ 7,292 $ 8,886
9/30/98 $ 9,066 $ 7,290 $ 8,655
10/31/98 $ 9,404 $ 7,796 $ 9,266
11/30/98 $ 9,805 $ 8,127 $ 9,563
12/31/98 $ 9,721 $ 8,273 $ 9,794
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Return -2.79% -17.27% -2.06%
</TABLE>
TEMPLETON PACIFIC GROWTH FUND
Severe economic contraction and upheaval for nearly all the Asian economies
characterized the year ended December 31, 1998. The effects of widespread
currency devaluation compelled governments across the region to make difficult
policy decisions to force economic reform. Against this backdrop, Templeton
Pacific Growth Fund's cumulative total return was -13.13% for the year, versus
2.69% for the MSCI Pacific Index.*
In the 1998 semiannual report, we outlined three core ideas that guided our
investment choices throughout the calendar year. First, we emphasized our faith
in the Singapore and Hong Kong economies' strength, owing to solid bankruptcy
laws and their respective governments' resolve to fend off currency speculation.
Shortly thereafter in August, the Hong Kong government reportedly faced down a
heavy round of speculation against the Hong Kong dollar currency peg. In our
view, its ability to fend off the speculative attack was a significant factor
fueling a dramatic stock market recovery, which significantly helped the
portfolio's performance.
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
28
<PAGE>
In Singapore, the strong government commitment ensuring that companies had funds
available to them helped fuel a rapid recovery in the stock markets.
Particularly important, we think, was the reduced amount of money commercial
banks must deposit with the Monetary Authority to guarantee solvency.
Singapore's standards previously were far above international standards, which,
in times of crisis, may have kept much-needed cash out of the economy. When we
last wrote, six months ago, the Singapore Straits Times Index was off 33.71%, in
U.S. dollar terms, for the first six months of 1998. As of the end of the
reporting period, the market had regained much of its lost ground, and was off
only 6.03% in U.S. dollar terms, for the year.
Second, in the semiannual report we stressed our belief that the Chinese
government would be able to maintain the fixed exchange rate regime throughout
the year to prevent another round of speculative devaluation across the region.
Chinese officials followed this course, in our opinion, correctly recognizing
that the regional instability resulting from devaluation would impose a far
higher cost than the localized pain of maintaining the Chinese yuan's value. In
October, the government re-emphasized its commitment to the fixed exchange rate,
and pledged to maintain it through 1999. On the down side, this commitment's
resulting cost may have slowed the pace of necessary economic reforms.
Lastly, we indicated in the semiannual report that, for the value investor, we
felt Japan was an expensive market and Japanese companies had many structural
problems the markets had not yet fully recognized. The Japanese market ended
1998 down 9.28% in local terms, in line with the decline in Japanese companies'
net profits. However, because many hedge funds covered their short positions in
the yen, the Nikkei 225 Index ended up positive in U.S. dollar terms at
year-end. The positive performance generally was in large companies whose
valuations were already very high relative to their earnings, while smaller
stocks were mainly flat for the year. We believe the portfolio underperformed
the MSCI Pacific Index because of the cautious stance we took in Japan. As of
the end of the reporting period, Japan was in a depressionary-type environment,
whereas we preferred to invest in regions or countries like Hong Kong and
Singapore that we believed had a brighter outlook and earnings visibility. 1998
was a unique year in that it saw Japan outperform Hong Kong and Singapore.
However, this superior performance was driven more by market manipulation than
by fundamentals. We choose to be underweight in this market until we see a
brighter picture.
In the first half of the year under review, we established large positions in
Hong Kong and Singapore. By contrast, in the last half of the year, we rounded
out our portfolio by increasing our weightings in non-local companies deriving a
significant amount of
GRAPHIC MATERIAL (31)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Pacific Growth Fund.
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
Templeton Pacific Growth Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY,COUNTRY NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Development Bank of Singapore Ltd., fgn. 4.5%
Banking, Singapore
Singapore Airlines Ltd., fgn. 4.0%
Transportation, Singapore
City Developments Ltd. 3.9%
Real Estate, Singapore
Wacoal Corp. 3.7%
Textiles & Apparel, Japan
Daito Trust Construction Co. Ltd. 3.6%
Construction & Housing, Japan
East Japan Railway Co. 3.4%
Transportation, Japan
Cheung Kong Holdings Ltd. 3.4%
Multi-Industry, Hong Kong
Mitsubishi Heavy Industries Ltd. 3.3%
Industrial Components, Japan
Cathay Pacific Airways Ltd. 3.0%
Transportation, Hong Kong
Fuji Heavy Industries Ltd. 2.9%
Industrial Components, Japan
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS MSCI.
GRAPHIC MATERIAL (33)
This chart shows the average annual total return for the Templeton Pacific
Growth Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------
<S> <C>
1-Year -13.13%
5-Year -9.45%
Since Inception (1/27/92) -1.68%
</TABLE>
- --------------------------------------------------------------------------------
their earnings from the Asian region. We felt that companies with international
exposure would be better equipped than local Asian companies to absorb the shock
of economic contraction, over the long term.
Looking ahead into 1999, we currently expect to see continued recovery
throughout the region, with a slow and uneven pace across countries. While in
Indonesia and Malaysia we expect further economic stagnation, in Japan, we saw
some small signs that the economy's deep problems were being worked out. The
fact that Japan's new government appeared to have grasped the depth of the task
ahead, and the possibility that political deadlock may give rise to positive
compromises toward the end of the next year were encouraging to us. In
particular, we are hopeful that, as new rules requiring greater financial
disclosure go into effect, we will be able to identify more of those companies
that follow sound financial practices. We will look to take advantage of market
dips to increase our positions in these types of companies.
In China, we expect the government will face considerably more challenges in
maintaining economic growth, while continuing structural reform. China created a
massive government stimulus package as part of its effort to increase its gross
domestic product. We do not believe it will be able to continue pumping money
into the economy without sacrificing the country's long-term economic growth
potential. Hence, we believe 1999 will be one of the toughest years for China to
date, and we anticipate flat or slightly negative earnings growth for most of
the country's companies.
We expect Singapore, Hong Kong, Thailand and Korea to see the strongest economic
performance over the coming year, and, on market dips, would look to increase
our holdings in these countries, along with Australia.
GRAPHIC MATERIAL (32)
This graph compares the performance of Pacific Growth Fund as tracked by the
growth in value of a $10,000 investment, to that of MSCI Pacific Index from
1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Morgan Stanley Capital International.
TOTAL RETURN INDEX COMPARISON
Templeton Pacific Growth Fund
$10,000 Investment (1/27/92 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON PACIFIC
GROWTH FUND MSCI PACIFIC INDEX
- --------------------------------------------------------------------------------
<S> <C> <C>
1/27/92 $10,000 $10,000
1/31/92 $10,000 $ 9,949
2/29/92 $10,000 $ 9,253
3/31/92 $10,000 $ 8,375
4/30/92 $10,010 $ 7,993
5/31/92 $10,210 $ 8,618
6/30/92 $10,450 $ 7,942
7/31/92 $ 9,900 $ 7,834
8/31/92 $ 9,570 $ 8,908
9/30/92 $ 9,790 $ 8,706
10/31/92 $10,230 $ 8,401
11/30/92 $10,110 $ 8,561
12/31/92 $ 9,880 $ 8,465
1/31/93 $ 9,980 $ 8,450
2/28/93 $10,330 $ 8,862
3/31/93 $10,270 $ 9,935
4/30/93 $10,920 $11,519
5/31/93 $11,290 $11,856
6/30/93 $11,100 $11,664
7/31/93 $11,230 $12,355
8/31/93 $11,770 $12,723
9/30/93 $11,840 $12,249
10/31/93 $13,110 $12,522
11/30/93 $12,970 $10,757
12/31/93 $14,610 $11,509
1/31/94 $14,720 $12,843
2/28/94 $14,300 $13,177
3/31/94 $13,330 $12,451
4/30/94 $13,520 $12,991
5/31/94 $14,080 $13,302
6/30/94 $13,704 $13,739
7/31/94 $13,956 $13,446
8/31/94 $14,549 $13,682
9/30/94 $14,006 $13,342
10/31/94 $14,100 $13,681
11/30/94 $13,194 $12,920
12/31/94 $13,325 $13,009
1/31/95 $12,359 $12,189
2/28/95 $12,872 $11,889
3/31/95 $13,194 $12,804
4/30/95 $13,376 $13,351
5/31/95 $13,899 $12,820
6/30/95 $13,643 $12,279
7/31/95 $14,170 $13,166
8/31/95 $14,005 $12,672
9/30/95 $14,263 $12,792
10/31/95 $13,694 $12,172
11/30/95 $13,767 $12,772
12/31/95 $14,387 $13,398
1/31/96 $15,556 $13,423
2/29/96 $15,504 $13,273
3/31/96 $15,535 $13,683
4/30/96 $16,228 $14,381
5/31/96 $16,280 $13,759
6/30/96 $16,136 $13,764
7/31/96 $15,259 $13,134
8/31/96 $15,638 $12,790
9/30/96 $15,866 $13,210
10/31/96 $15,357 $12,599
11/30/96 $16,180 $12,943
12/31/96 $15,985 $12,272
1/31/97 $15,736 $11,241
2/28/97 $15,801 $11,477
3/31/97 $15,205 $11,059
4/30/97 $15,303 $11,291
5/31/97 $16,169 $12,397
6/30/97 $16,461 $13,167
7/31/97 $16,737 $12,854
8/31/97 $14,034 $11,581
9/30/97 $14,354 $11,538
10/31/97 $11,717 $10,139
11/30/97 $10,691 $ 9,582
12/31/97 $10,239 $ 9,163
1/31/98 $ 9,389 $ 9,661
2/28/98 $10,691 $10,009
3/31/98 $10,393 $ 9,459
4/30/98 $ 9,676 $ 9,273
5/31/98 $ 8,341 $ 8,645
6/30/98 $ 7,532 $ 8,630
7/31/98 $ 7,295 $ 8,481
8/31/98 $ 6,063 $ 7,480
9/30/98 $ 6,632 $ 7,457
10/31/98 $ 8,290 $ 8,749
11/30/98 $ 8,882 $ 9,153
12/31/98 $ 8,894 $ 9,409
</TABLE>
<TABLE>
<S> <C> <C>
Total Return -11.06% -5.91%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
30
<PAGE>
PORTFOLIOS SEEKING GROWTH AND INCOME
GLOBAL UTILITIES SECURITIES FUND
(Prior to May 1, 1998, the Utility Equity Fund)
Volatility in the foreign and domestic equity markets marked the 1998 calendar
year, with slowing economic growth in Asia affecting the U.S., Europe and Latin
America. While we do not anticipate a global recession, the recent global
slowdown created a period of uncertainty where it was not uncommon for markets
to trade up or down by 5% or more in a single day. Over the reporting period,
Global Utilities Securities Fund delivered a +11.19% cumulative total return.
Our emphasis on U.S. electric utility companies helped reduce portfolio
fluctuation during the big down days throughout the year. At the same time this
caused the portfolio to underperform the Financial Times/S&P Actuaries World
Utilities Index, which had a more global distribution. In 1998, the portfolio
changed its name and objective to focus on global utilities, whereas before we
were primarily a U.S. electric utility fund. As opportunities present
themselves, we anticipate moving toward more global investments. Another drag on
our performance relative to the index was our more than 4% allocation in Latin
America and Asia, while the index favors developed countries.
Despite the shakeup in many of the markets in which we invest, we are optimistic
about global utility stocks going forward. The historically defensive nature of
utility stocks is one important reason for this confidence. While past results
may not repeat themselves, utility services have not been as sensitive to
economic slowdowns as most other industries, since electricity, telephone, gas,
water and similar services have tended to enjoy stable and predictable demand.
This has generally enabled utility companies to deliver steady earnings and
dividends even in times of economic uncertainty.
Your portfolio's industry weightings changed slightly over the period, with
electric utility companies having the heaviest weighting, comprising 66.7% of
total net assets, telecommunications companies increased almost 3% to comprise
25.1% of total net assets, while gas companies declined to 4.1%. On a regional
basis, Europe and the U.S. delivered the best returns, with Latin America and
Asia generally weaker. As shown by the chart to the right, portfolio weightings
as of December 31, 1998, reflected this.
The American electric industry fundamentally improved, not only in earnings and
cash flow projections, but also on regulatory reform. The 1990s saw the
industry's cash flow, as measured by the ratio of internal funds to total cash
construction expenditures, increase from 74.4% in 1990, to an estimated 133.4%
in 1997. The 1997 figure represented the third straight year of improvement and
the highest level of internally-generated funds ever recorded.* In general,
electric utilities appeared to use
GRAPHIC MATERIAL (34)
This chart shows in pie format the geographic distribution of the Global
Utilities Securities Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Global Utilities Securities Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
United States 73.88%
Europe 17.85%
Latin America 2.20%
Asia 1.95%
Short-term Investments & Other Assets 4.12%
</TABLE>
*Edison Electric Institute. 1997 Annual Report of the Investor-Owned Electric
Utility Industry.
31
<PAGE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (35)
This chart shows the top 10 holdings based on the percentage of total net assets
on 12/21/98 for the Global Utilities Securities Fund.
TOP 10 HOLDINGS
Global Utilities Securities Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
<S> <C>
Southern Co. 3.53%
GPU Inc. 3.36%
Telecom Italia SpA 3.20%
New Century Energies Inc. 3.01%
Florida Progress Corp. 2.94%
Cinergy Corp. 2.89%
Pinnacle West Capital Corp. 2.85%
FPL Group Inc. 2.78%
PG&E Corp. 2.73%
Entergy Corp. 2.67%
</TABLE>
- --------------------------------------------------------------------------------
the excess cash flow to enhance long-term earnings growth by paying down debt,
repurchasing shares and investing in energy related businesses, factors which we
believe bode well for domestic electric utility stocks going forward.
The U.S. market continued to provide many of the portfolio's best investment
vehicles, in our opinion. During the reporting period, we purchased shares of
Montana Power Co., CMS Energy Corp. and Edison International, three electric
utilities that benefited from the above-mentioned trends. We also believed that
domestic telecommunications stocks were poised for strong growth over the next
few years, and added positions in Bell Atlantic Corp. and Intermedia
Communications Inc. Meanwhile, domestic natural gas stocks experienced great
volatility over the recent period, with many stocks trading up sharply in
September, only to fall again in October. The El Nino weather system, which
created significantly warmer weather trends, contributed to this phenomenon by
negatively impacting gas demand and pricing.
In Europe, we maintained a favorable outlook, counting on the volatility that
should result from European Monetary Union's inception in 1999 to create buying
opportunities. The 1998 calendar year presented contrasts for utilities, with
superior performance in France, Belgium and Spain and laggard returns in
Portugal and Germany. A few of our new stock ideas in this region included
Spanish electric utility Endesa SA, AEM SpA, an Italian gas distribution and
electric utility, and Equant NV, a Europe-based telecommunications network
company that we think is poised to benefit from the huge growth of data
communications and the Internet. Going forward, we feel the economic trends in
the European area should be supportive for utilities, as most economists are
forecasting lower gross domestic product growth, possibly causing investors to
prefer more defensive sectors.
We maintained a guarded outlook for Latin America in the short term, while being
more optimistic for the longer term. During the year under review, the Asian
economic crisis that began in late 1997 continued to send shock waves through
Latin America, as investors evidently feared similar economic difficulties would
spread there. Many investors reportedly withdrew capital, and speculators
attacked the Latin American/U.S. dollar exchange rates, putting several
currencies under pressure. Long-term, we view positively the region's evolution
toward a more market-oriented economic environment and believe it may continue
to provide attractive investment opportunities in the future.
32
<PAGE>
The Asian financial crisis made headlines around the world in late 1997 and
early 1998. Fortunately, we had a small weighting in Asian stock investments at
that time. In fact, we have been under-invested in Asia for the past few years,
due to concerns of over-valuation and the potential for exactly the kind of
crisis that just occurred. Your portfolio's weighting in Asia was just 1.95% of
total net assets as of year-end. Although stock prices have fallen dramatically
since the crisis started, we expect to be cautious in looking for bargains in
these markets over the coming year. While many stocks appear cheap at recent
levels, we are still concerned that economic indicators have not yet hit bottom.
In the future we will employ caution as we look for the highest return
securities with the lowest relative risk profiles.
In conclusion, we note that the year ended December 31, 1998, was a difficult
one in many parts of the world. The Asian economic crisis resulted in a
significantly higher level of volatility than investors usually encounter.
However, we believe the long-term outlook for global utility stocks is still
very robust, as many of the demographic, economic and social factors that
contributed to the high returns in the past may exist for many years ahead. We
will seek to benefit from accelerating worldwide demand for telecommunications,
electric power, gas, water and other utility services, as many foreign countries
are just now building infrastructures that will produce high levels of revenue
and earnings growth in the future.
GRAPHIC MATERIAL (36)
This graph compares the performance of Global Utilities Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of S&P 500
Index, the Consumer Price Index, and the FT/S&P Actuaries World Utilities Index
from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Global Utilities Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
FT/S&P
GLOBAL ACTUARIES
UTILITIES CONSUMER WORLD
SECURITIES PRICE UTILITIES
FUND S&P500 INDEX INDEX
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000 $10,000
1/31/89 $10,020 1.65% $ 10,165 0.11% $ 10,011 0.76% $10,076
2/28/89 $10,080 -2.49% $ 9,912 0.41% $ 10,052 -3.42% $9,731
3/31/89 $10,150 2.33% $ 10,143 0.58% $ 10,111 -3.16% $9,424
4/30/89 $10,210 5.19% $ 10,670 0.65% $ 10,176 4.22% $9,821
5/31/89 $10,610 4.05% $ 11,102 0.57% $ 10,234 0.21% $9,842
6/30/89 $10,730 -0.57% $ 11,038 0.24% $ 10,259 -1.26% $9,718
7/31/89 $11,260 9.03% $ 12,035 0.24% $ 10,284 11.32% $10,818
8/31/89 $11,100 1.96% $ 12,271 0.16% $ 10,300 -4.35% $10,348
9/30/89 $11,160 -0.41% $ 12,221 0.32% $ 10,333 3.79% $10,740
10/31/89 $11,260 -2.32% $ 11,937 0.48% $ 10,383 -1.42% $10,587
11/30/89 $11,500 2.04% $ 12,181 0.24% $ 10,407 5.58% $11,178
12/31/89 $12,140 2.40% $ 12,473 0.16% $ 10,424 4.85% $11,720
1/31/90 $11,680 -6.71% $ 11,636 1.03% $ 10,531 -7.60% $10,829
2/28/90 $11,750 1.29% $ 11,786 0.47% $ 10,581 -2.82% $10,524
3/31/90 $11,668 2.65% $ 12,099 0.55% $ 10,639 -4.78% $10,021
4/30/90 $11,153 -2.49% $ 11,797 0.16% $ 10,656 -2.51% $9,769
5/31/90 $11,607 9.75% $ 12,948 0.23% $ 10,681 9.98% $10,744
6/30/90 $11,678 -0.67% $ 12,861 0.54% $ 10,738 -2.87% $10,436
7/31/90 $11,839 -0.32% $ 12,820 0.38% $ 10,779 -0.57% $10,377
8/31/90 $11,103 -9.04% $ 11,661 0.92% $ 10,878 -7.81% $9,566
9/30/90 $11,113 -4.87% $ 11,093 0.84% $ 10,970 -4.93% $9,095
10/31/90 $11,899 -0.43% $ 11,045 0.60% $ 11,036 11.70% $10,159
11/30/90 $12,192 6.46% $ 11,759 0.22% $ 11,060 -0.07% $10,152
12/31/90 $12,363 2.79% $ 12,087 0.00% $ 11,060 2.07% $10,362
1/31/91 $12,232 4.36% $ 12,614 0.60% $ 11,126 1.94% $10,563
2/28/91 $12,676 7.15% $ 13,516 0.15% $ 11,143 4.71% $11,060
3/31/91 $12,888 2.42% $ 13,843 0.15% $ 11,160 -2.08% $10,830
4/30/91 $12,989 0.24% $ 13,876 0.15% $ 11,176 0.88% $10,925
5/31/91 $12,968 4.31% $ 14,474 0.30% $ 11,210 0.83% $11,016
6/30/91 $12,871 -4.58% $ 13,811 0.29% $ 11,242 -4.21% $10,552
7/31/91 $13,379 4.66% $ 14,455 0.15% $ 11,259 5.57% $11,140
8/31/91 $13,742 2.37% $ 14,797 0.29% $ 11,292 1.71% $11,331
9/30/91 $14,218 -1.67% $ 14,550 0.44% $ 11,342 3.44% $11,720
10/31/91 $14,426 1.34% $ 14,745 0.15% $ 11,359 1.40% $11,884
11/30/91 $14,706 -4.03% $ 14,151 0.29% $ 11,392 -1.60% $11,694
12/31/91 $15,276 11.44% $ 15,770 0.07% $ 11,400 7.02% $12,515
1/31/92 $14,757 -1.86% $ 15,476 0.15% $ 11,417 -4.29% $11,978
2/29/92 $14,726 1.29% $ 15,676 0.36% $ 11,458 -1.24% $11,830
3/31/92 $14,633 -1.95% $ 15,370 0.51% $ 11,516 -3.20% $11,451
4/30/92 $15,068 2.94% $ 15,822 0.14% $ 11,532 3.38% $11,838
5/31/92 $15,358 0.49% $ 15,900 0.14% $ 11,548 2.45% $12,128
6/30/92 $15,543 -1.49% $ 15,663 0.36% $ 11,590 -1.18% $11,985
7/31/92 $16,378 4.09% $ 16,303 0.21% $ 11,614 3.85% $12,447
8/31/92 $16,315 -2.05% $ 15,969 0.28% $ 11,647 2.45% $12,752
9/30/92 $16,389 1.17% $ 16,156 0.28% $ 11,679 -1.82% $12,519
10/31/92 $16,283 0.34% $ 16,211 0.35% $ 11,720 -2.07% $12,260
11/30/92 $16,304 3.40% $ 16,762 0.14% $ 11,737 2.05% $12,512
12/31/92 $16,738 1.23% $ 16,968 -0.07% $ 11,729 2.55% $12,831
1/31/93 $17,003 0.84% $ 17,111 0.49% $ 11,786 1.35% $13,004
2/28/93 $17,923 1.36% $ 17,344 0.35% $ 11,827 5.05% $13,661
3/31/93 $18,082 2.11% $ 17,710 0.35% $ 11,869 5.76% $14,447
4/30/93 $18,092 -2.42% $ 17,281 0.28% $ 11,902 1.93% $14,726
5/31/93 $18,018 2.67% $ 17,742 0.14% $ 11,919 1.74% $14,983
6/30/93 $18,459 0.29% $ 17,794 0.14% $ 11,935 1.94% $15,273
7/31/93 $18,826 -0.40% $ 17,723 0.00% $ 11,935 2.45% $15,647
8/31/93 $19,344 3.79% $ 18,394 0.28% $ 11,969 4.25% $16,312
9/30/93 $19,247 -0.77% $ 18,253 0.21% $ 11,994 -1.53% $16,063
10/31/93 $19,128 2.07% $ 18,631 0.41% $ 12,043 1.78% $16,349
11/30/93 $18,221 -0.95% $ 18,454 0.07% $ 12,051 -5.21% $15,497
12/31/93 $18,502 1.21% $ 18,677 0.00% $ 12,051 3.13% $15,982
1/31/94 $18,124 3.40% $ 19,312 0.27% $ 12,084 3.45% $16,533
2/28/94 $17,206 -2.71% $ 18,789 0.34% $ 12,125 -4.16% $15,846
3/31/94 $16,602 -4.36% $ 17,969 0.34% $ 12,166 -3.88% $15,231
4/30/94 $16,991 1.28% $ 18,199 0.14% $ 12,183 1.81% $15,507
5/31/94 $16,105 1.64% $ 18,498 0.07% $ 12,192 -1.63% $15,254
6/30/94 $15,486 -2.45% $ 18,045 0.34% $ 12,233 -2.24% $14,912
7/31/94 $16,280 3.28% $ 18,637 0.27% $ 12,266 2.62% $15,303
8/31/94 $16,439 4.10% $ 19,401 0.40% $ 12,315 2.22% $15,643
9/30/94 $16,030 -2.44% $ 18,927 0.27% $ 12,349 -2.77% $15,209
10/31/94 $16,340 2.25% $ 19,353 0.07% $ 12,357 1.46% $15,431
11/30/94 $16,431 -3.64% $ 18,649 0.13% $ 12,373 -4.07% $14,803
12/31/94 $16,363 1.48% $ 18,925 0.00% $ 12,373 -0.71% $14,698
1/31/95 $17,316 2.59% $ 19,415 0.40% $ 12,423 0.81% $14,817
2/28/95 $17,384 3.90% $ 20,172 0.40% $ 12,472 0.14% $14,838
3/31/95 $17,134 2.95% $ 20,767 0.33% $ 12,514 2.81% $15,255
4/30/95 $17,497 2.94% $ 21,378 0.33% $ 12,555 3.52% $15,792
5/31/95 $18,462 4.00% $ 22,233 0.20% $ 12,580 1.35% $16,005
6/30/95 $18,443 2.32% $ 22,748 0.20% $ 12,605 0.56% $16,095
7/31/95 $18,479 3.32% $ 23,504 0.00% $ 12,605 2.87% $16,557
8/31/95 $18,659 0.25% $ 23,563 0.26% $ 12,638 -0.32% $16,504
9/30/95 $19,716 4.22% $ 24,557 0.20% $ 12,663 4.80% $17,296
10/31/95 $20,160 -0.36% $ 24,468 0.33% $ 12,705 -0.93% $17,135
11/30/95 $20,496 4.39% $ 25,543 -0.07% $ 12,696 1.29% $17,356
12/31/95 $21,493 1.93% $ 26,036 -0.07% $ 12,687 3.38% $17,943
1/31/96 $21,877 3.40% $ 26,921 0.59% $ 12,762 1.40% $18,194
2/29/96 $21,481 0.93% $ 27,171 0.32% $ 12,803 -1.09% $17,995
3/31/96 $21,469 0.96% $ 27,432 0.52% $ 12,870 -0.94% $17,826
4/30/96 $21,025 1.47% $ 27,835 0.39% $ 12,920 2.68% $18,304
5/31/96 $21,493 2.58% $ 28,553 0.19% $ 12,944 -0.86% $18,147
6/30/96 $22,443 0.38% $ 28,662 0.06% $ 12,952 1.29% $18,381
7/31/96 $21,266 -4.42% $ 27,395 0.19% $ 12,977 -4.87% $17,486
8/31/96 $21,722 2.11% $ 27,973 0.19% $ 13,001 0.05% $17,494
9/30/96 $21,848 5.63% $ 29,548 0.32% $ 13,043 1.28% $17,718
10/31/96 $22,557 2.76% $ 30,363 0.32% $ 13,085 2.42% $18,147
11/30/96 $22,962 7.56% $ 32,659 0.19% $ 13,110 4.89% $19,034
12/31/96 $23,013 -1.98% $ 32,012 0.00% $ 13,110 2.22% $19,457
1/31/97 $23,507 6.25% $ 34,013 0.32% $ 13,151 0.79% $19,611
2/28/97 $23,481 0.78% $ 34,278 0.31% $ 13,192 0.55% $19,719
3/31/97 $22,709 -4.11% $ 32,870 0.25% $ 13,225 -2.83% $19,161
4/30/97 $22,494 5.97% $ 34,832 0.12% $ 13,241 1.46% $19,440
5/31/97 $23,924 6.09% $ 36,953 -0.06% $ 13,233 6.61% $20,725
6/30/97 $24,709 4.48% $ 38,609 0.12% $ 13,249 4.62% $21,683
7/31/97 $25,298 7.96% $ 41,682 0.12% $ 13,265 1.41% $21,988
8/31/97 $24,437 -5.60% $ 39,348 0.19% $ 13,290 -4.86% $20,920
9/30/97 $25,714 5.48% $ 41,504 0.25% $ 13,323 6.72% $22,326
10/31/97 $25,283 -3.34% $ 40,118 0.25% $ 13,357 -1.45% $22,002
11/30/97 $26,962 4.63% $ 41,975 -0.06% $ 13,349 7.00% $23,542
12/31/97 $29,172 1.72% $ 42,697 -0.12% $ 13,333 4.16% $24,521
1/31/98 $28,282 1.11% $ 43,171 0.19% $ 13,358 3.27% $25,323
2/28/98 $29,516 7.21% $ 46,284 0.19% $ 13,383 2.58% $25,977
3/31/98 $31,755 5.12% $ 48,653 0.19% $ 13,409 8.96% $28,304
4/30/98 $30,736 1.01% $ 49,145 0.18% $ 13,433 -2.18% $27,687
5/31/98 $29,990 -1.72% $ 48,300 0.18% $ 13,457 -1.16% $27,366
6/30/98 $31,071 4.06% $ 50,260 0.12% $ 13,473 3.25% $28,255
7/31/98 $30,167 -1.07% $ 49,723 0.12% $ 13,489 3.12% $29,137
8/31/98 $28,135 -14.46% $ 42,533 0.12% $ 13,506 -7.88% $26,841
9/30/98 $29,659 6.41% $ 45,259 0.12% $ 13,522 5.24% $28,247
10/31/98 $30,230 8.13% $ 48,939 0.24% $ 13,554 5.88% $29,908
11/30/98 $30,944 6.06% $ 51,904 0.00% $ 13,554 3.84% $31,057
12/31/98 $32,436 4.82% 5.76% $ 54,894 -0.06% $ 13,546 7.91% $33,513
</TABLE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (37)
This chart shows the average annual total return for the Global Utilities
Securities Funds as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year +11.19%
5-Year +11.88%
Since Inception (1/24/89) +12.57%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
33
<PAGE>
GRAPHIC MATERIAL (38)
This chart shows the top 10 holdings and their respective based on the
percentage of total net assets on 12/31/98 for the Growth and Income Fund.
TOP 10 HOLDINGS
Growth and Income Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
Bell Atlantic Corp. 3.0%
Telecommunications
Pharmacia & Upjohn Inc. 2.6%
Health Technology
Atlantic Richfield Co. 2.6%
Energy Minerals
J.C. Penney Co. Inc. 2.2%
Retail Trade
UST Inc. 2.0%
Consumer Non-Durables
Texaco Inc. 2.0%
Energy Minerals
Chevron Corp. 1.9%
Energy Minerals
Dominion Resources Inc. 1.8%
Utilities
GTE Corp. 1.8%
Telecommunications
Philip Morris Cos. Inc. 1.8%
Consumer Non-Durables
</TABLE>
GROWTH AND INCOME FUND
1998 witnessed increased volatility in the world's stock markets. In this
environment, investors generally preferred large capitalization growth stocks,
which, as they have done since 1994, outperformed traditional value stocks for
the 12-month period. Growth and Income Fund, which utilizes a value investment
discipline, reflected these trends.
In keeping with its fundamental investment approach, the portfolio seeks to
invest in stocks with attractive valuations. We look for stocks selling at
bargain prices according to measurements such as relative dividend yields, book
value, revenues and normalized earnings.* This generally entails investing in
stocks at what we feel are temporarily depressed prices. At the same time we
collect current investment returns, in the form of dividends, which can provide
a cushion against possible stock declines. Our investments typically fall into
three categories: cyclical stocks; "special situation" stocks; and traditional,
high dividend-paying stocks such as utilities, real estate investment trusts
(REITs), and energy.
As of year-end, we remained heavily weighted in traditionally high-yielding
stocks. However, we did take profits based on the strength of various energy and
telephone utility positions during the year. On the other hand, our investments
in REITs did not meet expectations. Looking forward into 1999, we believe their
performance may improve as capital market constraints have improved industry
fundamentals and many holdings offer attractive dividend yields of 7% or more.
The investment in Ford Motor Co. in late 1997 typifies our strategy for cyclical
stocks. Seeking to invest in companies with attractive dividend yields and
assets, we found Ford's adjusted dividend yield in excess of 5% and their
balance sheet appealing with over $10 per share at the time of purchase. The
company was also trading at six times estimated earnings and was spinning off
its consumer finance subsidiary at a value in excess of $16 per share. Our
investment was rewarded when Ford became one of the portfolio's best performers
in 1998, with a one-year total return gain of approximately 85%. Our
commodity-sensitive cyclical holdings did not fare as well during the year, as
the price of many commodities fell to 20-year lows. We took profits in paper and
building products producers Georgia Pacific Corp. and Millennium Chemicals,
Inc., and realized losses in Freeport McMoran Copper and Gold, Inc. and Portucel
Industrial SA, a Europe-based forest products company.
*Normalized earnings estimate a company's earnings during periods of normal
economic activity, attempting to factor out extremes produced by cyclical
strength or weakness.
34
<PAGE>
During 1998, many of our new investments fell into the "special situations"
category. Often referred to as "fallen angels," these stocks are typically
high-quality growth companies that have experienced a short-term slowing in
their businesses, but continue to maintain excellent, long-term potential.
Examples of these investments include Diebold Inc., the world's largest
automated teller machine manufacturer; Pitney Bowes Inc., a top-ranked producer
of postage meters; Federal Signal Corp., maker of safety and rescue equipment;
Pall Corp., a leading filter supplier; and Avery Dennison Corp., a global leader
in consumer label and adhesive products.
Our search for undervalued stocks also led to numerous "takeovers" among the
portfolio's 1998 holdings. Twelve of our approximately 80 positions were subject
to acquisition bids during the year. Those holdings included Chrysler Corp.;
Union Camp Corp.; Illinois Central Corp. railroad; electronics connector AMP
Inc.; utilities company PacifiCorp; financial companies Mid Ocean Ltd. and
Beneficial Corp.; oil companies Amoco Corp. and Mobil Corp.; and
telecommunications companies GTE Corp., Ameritech Corp. and Southern New England
Telecommunications Corp.
GRAPHIC MATERIAL (39)
This graph compares the performance of Growth and Income Fund as tracked by the
growth in value of a $10,000 investment, to that of S&P 500 Index, and the
Consumer Price Index from 1/24/89 12/31/98.
Looking forward, we anticipate continued high levels of financial market
volatility. Corporate America will likely face earnings growth challenges
near-term, while overall stock market valuations remain historically high.
Importantly, volatility can offer opportunities to invest in quality companies
at bargain levels, as widely fluctuating stock prices often reflect emotional
swings rather than historical fundamentals. Consistent with historical long-term
market cycles, we feel that the recent phenomenon of growth stocks outperforming
value issues will reverse, possibly soon. If this happens, we believe our
disciplined, value-oriented approach may be very well positioned for such a
market environment.
TOTAL RETURN INDEX COMPARISON
Growth and Income Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
GROWTH & CONSUMER PRICE
INCOME S&P 500 INDEX
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $10,000
1/31/89 $10,020 1.65% $ 10,165 0.11% $10,011
2/28/89 $10,080 -2.49% $ 9,912 0.41% $10,052
3/31/89 $10,150 2.33% $ 10,143 0.58% $10,111
4/30/89 $10,210 5.19% $ 10,670 0.65% $10,176
5/31/89 $10,280 4.05% $ 11,102 0.57% $10,234
6/30/89 $9,990 -0.57% $ 11,038 0.24% $10,259
7/31/89 $10,530 9.03% $ 12,035 0.24% $10,284
8/31/89 $11,020 1.96% $ 12,271 0.16% $10,300
9/30/89 $10,680 -0.41% $ 12,221 0.32% $10,333
10/31/89 $10,040 -2.32% $ 11,937 0.48% $10,383
11/30/89 $10,110 2.04% $ 12,181 0.24% $10,407
12/31/89 $10,290 2.40% $ 12,473 0.16% $10,424
1/31/90 $9,760 -6.71% $ 11,636 1.03% $10,531
2/28/90 $9,920 1.29% $ 11,786 0.47% $10,581
3/31/90 $10,159 2.65% $ 12,099 0.55% $10,639
4/30/90 $9,958 -2.49% $ 11,797 0.16% $10,656
5/31/90 $10,824 9.75% $ 12,948 0.23% $10,681
6/30/90 $10,693 -0.67% $ 12,861 0.54% $10,738
7/31/90 $10,623 -0.32% $ 12,820 0.38% $10,779
8/31/90 $9,736 -9.04% $ 11,661 0.92% $10,878
9/30/90 $9,343 -4.87% $ 11,093 0.84% $10,970
10/31/90 $9,242 -0.43% $ 11,045 0.60% $11,036
11/30/90 $9,776 6.46% $ 11,759 0.22% $11,060
12/31/90 $10,048 2.79% $ 12,087 0.00% $11,060
1/31/91 $10,683 4.36% $ 12,614 0.60% $11,126
2/28/91 $11,127 7.15% $ 13,516 0.15% $11,143
3/31/91 $11,147 2.42% $ 13,843 0.15% $11,160
4/30/91 $11,177 0.24% $ 13,876 0.15% $11,176
5/31/91 $11,600 4.31% $ 14,474 0.30% $11,210
6/30/91 $10,853 -4.58% $ 13,811 0.29% $11,242
7/31/91 $11,243 4.66% $ 14,455 0.15% $11,259
8/31/91 $11,623 2.37% $ 14,797 0.29% $11,292
9/30/91 $11,541 -1.67% $ 14,550 0.44% $11,342
10/31/91 $11,664 1.34% $ 14,745 0.15% $11,359
11/30/91 $11,161 -4.03% $ 14,151 0.29% $11,392
12/31/91 $12,054 11.44% $ 15,770 0.07% $11,400
1/31/92 $12,577 -1.86% $ 15,476 0.15% $11,417
2/29/92 $12,587 1.29% $ 15,676 0.36% $11,458
3/31/92 $12,125 -1.95% $ 15,370 0.51% $11,516
4/30/92 $12,146 2.94% $ 15,822 0.14% $11,532
5/31/92 $12,218 0.49% $ 15,900 0.14% $11,548
6/30/92 $11,943 -1.49% $ 15,663 0.36% $11,590
7/31/92 $12,295 4.09% $ 16,303 0.21% $11,614
8/31/92 $12,119 -2.05% $ 15,969 0.28% $11,647
9/30/92 $12,420 1.17% $ 16,156 0.28% $11,679
10/31/92 $12,658 0.34% $ 16,211 0.35% $11,720
11/30/92 $13,135 3.40% $ 16,762 0.14% $11,737
12/31/92 $13,259 1.23% $ 16,968 -0.07% $11,729
1/31/93 $13,363 0.84% $ 17,111 0.49% $11,786
2/28/93 $13,280 1.36% $ 17,344 0.35% $11,827
3/31/93 $13,653 2.11% $ 17,710 0.35% $11,869
4/30/93 $13,477 -2.42% $ 17,281 0.28% $11,902
5/31/93 $13,840 2.67% $ 17,742 0.14% $11,919
6/30/93 $13,676 0.29% $ 17,794 0.14% $11,935
7/31/93 $13,477 -0.40% $ 17,723 0.00% $11,935
8/31/93 $13,979 3.79% $ 18,394 0.28% $11,969
9/30/93 $13,896 -0.77% $ 18,253 0.21% $11,994
10/31/93 $14,105 2.07% $ 18,631 0.41% $12,043
11/30/93 $13,990 -0.95% $ 18,454 0.07% $12,051
12/31/93 $14,627 1.21% $ 18,677 0.00% $12,051
1/31/94 $15,453 3.40% $ 19,312 0.27% $12,084
2/28/94 $15,255 -2.71% $ 18,789 0.34% $12,125
3/31/94 $14,345 -4.36% $ 17,969 0.34% $12,166
4/30/94 $14,429 1.28% $ 18,199 0.14% $12,183
5/31/94 $14,471 1.64% $ 18,498 0.07% $12,192
6/30/94 $14,003 -2.45% $ 18,045 0.34% $12,233
7/31/94 $14,409 3.28% $ 18,637 0.27% $12,266
8/31/94 $14,889 4.10% $ 19,401 0.40% $12,315
9/30/94 $14,452 -2.44% $ 18,927 0.27% $12,349
10/31/94 $14,663 2.25% $ 19,353 0.07% $12,357
11/30/94 $14,118 -3.64% $ 18,649 0.13% $12,373
12/31/94 $14,332 1.48% $ 18,925 0.00% $12,373
1/31/95 $14,449 2.59% $ 19,415 0.40% $12,423
2/28/95 $15,026 3.90% $ 20,172 0.40% $12,472
3/31/95 $15,453 2.95% $ 20,767 0.33% $12,514
4/30/95 $15,912 2.94% $ 21,378 0.33% $12,555
5/31/95 $16,403 4.00% $ 22,233 0.20% $12,580
6/30/95 $16,505 2.32% $ 22,748 0.20% $12,605
7/31/95 $16,782 3.32% $ 23,504 0.00% $12,605
8/31/95 $16,982 0.25% $ 23,563 0.26% $12,638
9/30/95 $17,715 4.22% $ 24,557 0.20% $12,663
10/31/95 $17,582 -0.36% $ 24,468 0.33% $12,705
11/30/95 $18,270 4.39% $ 25,543 -0.07% $12,696
12/31/95 $19,037 1.93% $ 26,036 -0.07% $12,687
1/31/96 $19,426 3.40% $ 26,921 0.59% $12,762
2/29/96 $19,226 0.93% $ 27,171 0.32% $12,803
3/31/96 $19,426 0.96% $ 27,432 0.52% $12,870
4/30/96 $19,526 1.47% $ 27,835 0.39% $12,920
5/31/96 $19,725 2.58% $ 28,553 0.19% $12,944
6/30/96 $20,092 0.38% $ 28,662 0.06% $12,952
7/31/96 $19,348 -4.42% $ 27,395 0.19% $12,977
8/31/96 $19,621 2.11% $ 27,973 0.19% $13,001
9/30/96 $20,141 5.63% $ 29,548 0.32% $13,043
10/31/96 $20,736 2.76% $ 30,363 0.32% $13,085
11/30/96 $21,727 7.56% $ 32,659 0.19% $13,110
12/31/96 $21,739 -1.98% $ 32,012 0.00% $13,110
1/31/97 $22,358 6.25% $ 34,013 0.32% $13,151
2/28/97 $22,879 0.78% $ 34,278 0.31% $13,192
3/31/97 $22,383 -4.11% $ 32,870 0.25% $13,225
4/30/97 $22,680 5.97% $ 34,832 0.12% $13,241
5/31/97 $23,882 6.09% $ 36,953 -0.06% $13,233
6/30/97 $24,572 4.48% $ 38,609 0.12% $13,249
7/31/97 $25,841 7.96% $ 41,682 0.12% $13,265
8/31/97 $25,325 -5.60% $ 39,348 0.19% $13,290
9/30/97 $26,739 5.48% $ 41,504 0.25% $13,323
10/31/97 $25,960 -3.34% $ 40,118 0.25% $13,357
11/30/97 $27,123 4.63% $ 41,975 -0.06% $13,349
12/31/97 $27,770 1.72% $ 42,697 -0.12% $13,333
1/31/98 $27,572 1.11% $ 43,171 0.19% $13,358
2/28/98 $28,735 7.21% $ 46,284 0.19% $13,383
3/31/98 $30,295 5.12% $ 48,653 0.19% $13,409
4/30/98 $29,793 1.01% $ 49,145 0.18% $13,433
5/31/98 $29,357 -1.72% $ 48,300 0.18% $13,457
6/30/98 $29,271 4.06% $ 50,260 0.12% $13,473
7/31/98 $28,533 -1.07% $ 49,723 0.12% $13,489
8/31/98 $25,991 -14.46% $ 42,533 0.12% $13,506
9/30/98 $27,572 6.41% $ 45,259 0.12% $13,522
10/31/98 $28,976 8.13% $ 48,939 0.24% $13,554
11/30/98 $29,936 6.06% $ 51,904 0.00% $13,554
12/31/98 $30,084 0.49% 5.76% $ 54,894 -0.06% $13,546
</TABLE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (40)
This chart shows the average annual total return for Growth and Income Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------
<S> <C>
1-Year +8.33%
5-Year +15.51%
Since Inception (1/24/89) +11.72%
</TABLE>
- --------------------------------------------------------------------------------
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
35
<PAGE>
GRAPHIC MATERIAL (41)
This chart shows the top 10 holdings based on the percentage of total net assets
on 12/31/98 for the Income Securities Fund.
TOP 10 HOLDINGS
Income Securities Fund
12/31/98
<TABLE>
<CAPTION>
% of Total
Issuer Net Assets
- --------------------------------------------------------------
<S> <C>
U.S. T-Bonds, Bonds 13.3%
Republic of Argentina, Bonds 6.08%
Republic of Brazil, Bonds 3.28%
Philip Morris Cos. Inc., Stock 2.25%
Republic of Korea, Bonds 2.09%
Texas Utilities Co., Stock 1.72%
New Century Energies Inc., Stock 1.56%
American Electric Power Co. Inc.,
Stock 1.55%
Cinergy Corp., Stock. 1.48%
Escom, Bonds 1.32%
</TABLE>
INCOME SECURITIES FUND
Although the 12-month period presented us with several investment opportunities,
your portfolio's sector weightings did not change significantly. The stock
weighting increased from 45% to 46.9%, and the overall bond weighting and the
cash position remained steady at 50% and less than 3%, respectively.
Our bond holdings consisted of corporate, foreign and U.S. Treasury bonds.
Corporate bonds, representing our largest fixed-income weighting, declined to
23.5% of total net assets, largely because of calls or tenders at premium prices
from issuers seeking to retire debt. Several of these calls and tenders resulted
from the acquisition of bond issuers by companies with stronger credit profiles.
Corporate bonds benefiting from merger and acquisitions activity included issues
from Calmar, Inc., Americold Corp., Ralphs Grocery Co., Food 4 Less, Inc. and
Doane Products Co. Our corporate bond sector performed well over most of the
period, but faced a challenging environment toward the end of the year, as it
became evident that economic growth would most likely slow in the foreseeable
future. Although we remained selective with respect to our investments in
corporate bonds, we were able to find several potentially attractive
investments, including new positions in oil refiner Compania de Conproca SA
S.F., Nextel Communications Inc. in telecommunications, Venetian Casino/Las
Vegas Sands in gaming, paging company MetroCall Inc., and infant and toddler
product company Evenflo Company Inc.
We added to the portfolio's U.S. Treasury holdings early in the period, as we
believed that Treasury bonds represented an attractive investment due to the
subdued inflation environment and prospects for a U.S. government budget
surplus. Treasury bonds subsequently rose in value, benefiting in our view from
these positive conditions as well as from concerns over international economic
turmoil and the potential for slowing domestic growth. As a consequence, U.S.
Treasury bonds represented 13.3% of total net assets on December 31, 1998, up
from 8.3% a year earlier.
The Asian crises, combined with economic uncertainty in other international
markets such as Russia and Latin America, apparently dealt a blow to many
countries' stock and bond markets. Seeking to take advantage of weakness in the
period, we focused on dollar-denominated bonds of countries we believed would
work with the International Monetary Fund and G7* countries to continue economic
reform and to achieve
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K, Italy and Canada.
36
<PAGE>
financial stability. Consequently, we initiated positions in Korean and Russian
dollar-denominated government bonds.
The portfolio's equity sectors delivered mixed performances with utility stocks
performing well. We feel utility stocks' healthy performance was partly due to
lower interest rates and consolidation within the industry. These securities
also benefited when CalEnergy Co. Inc., an independent power producer, made an
acquisition bid for MidAmerican Energy Holdings Co. We subsequently took a
profit in our MidAmerican position, as the shares appeared fully valued. The
entry of non-traditional buyers into the utility market is a developing trend
that we expect to continue. Indeed, two more of our holdings subsequently
received buyout offers from two U.K. utility companies. We continue to believe
utility stocks offer attractive yields and value relative to the broader stock
market, as well as improving growth opportunities from companies that adapt to a
deregulated environment. In addition to solid performance from our utility
stocks, the portfolio's largest position, Philip Morris Cos. Inc., also
performed well during the year as progress was made on tobacco litigation with
the recently announced state attorneys' general settlement.
The portfolio's gold, energy and real estate stock sectors experienced declines
during the period as a result of supply and demand concerns. Gold bullion prices
fell steeply amid uncertainty related to central bank reserve selling. We added
to several existing positions on weakness, and took a position in Barrick Gold
Corp. through the purchase of Trizec Hahn Corp.'s convertible bond issue, which
is convertible into Barrick Gold common stock. Our gold positions benefited the
portfolio when the sector rebounded during September's financial market turmoil.
Weakness in energy stocks, related to declining oil prices, also offered what we
believed were attractive long-term values. Consequently, we added to positions
in Energy Ventures Inc. (EVI) and Lomak Financing Trust convertible preferred
stocks. In the real estate sector, we initiated four real estate investment
trust (REIT) convertible security positions, representing a diverse mix of
property types with attractive dividend yields. These positions included
Meristar Hospitality Corp., Innkeepers USA Trust, Reckson Associates Realty
Corp. and Glenborough Realty Trust Inc. As of the end of the reporting period,
we believed REITS were undervalued relative to the overall stock market,
particularly in light of continued industry strength. Finally, in addition to
the previously mentioned purchases, we sold or trimmed several positions that
had appreciated during the year and
37
<PAGE>
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are Standard & Poor's Micropal and Lipper.
GRAPHIC MATERIAL (43)
This chart shows the average annual total return for Growth and Income Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------------
<S> <C>
1-Year +1.64%
5-Year +8.73%
Since Inception (1/24/89) +11.23%
</TABLE>
no longer fit our valuation criteria. These included Acclaim Entertainment, Inc.
convertible bonds in entertainment software and Cablevision Systems Corp.
preferred stock in cable television, both of which nearly doubled in value over
the past year.
We note that in a strong environment for equities, with the S&P 500 Index up
28.6%, the portfolio's 50.7% fixed-income weighting contributed to its lower,
+1.64% one-year cumulative total return.* Our substantial fixed-income weighting
also hurt performance relative to the Lipper Income Funds Average, which is
skewed towards funds with higher equity concentrations. The Lipper funds
typically have lower yields, meaning that they are more sensitive to movement in
the stock market. Meanwhile, the Lehman Brothers Government/Corporate Bond Index
was able to deliver superior performance mostly due to its greater weighting in
government securities, which outperformed corporate bonds during the reporting
period.
We remain selective with respect to new purchases, amid increased stock and bond
market volatility. However, we will continue to be opportunistic and utilize
fundamental research in our search for investment opportunities across markets.
As always, we remain committed to our value-oriented approach, seeking income
and growth from a diversified mix of stocks, bonds and cash.
GRAPHIC MATERIAL (42)
This graph compares the performance of Income securities Fund as tracked by the
growth in value of a $10,000 investment, to that of the Lehman brothers
Government/Corporate Bond Index, the S&P 500 Index, and the Lipper Income Funds
Objective Average Index from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are Standard & Poor's Micropal and Lipper.
Inception: 1/24/89 January Proration: 31-24 = 7 days,
7/31 = 22.58%
Lipper Proration 90-24 = 66 days, 66/90 = 73.33%.
3.33 * 73.33% = 2.44%
TOTAL RETURN INDEX COMPARISON
Income Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Income Securities Lehman Brothers S&P500 Lipper Income Average
Government/Corporate Bond
Index
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,150 0.07% $10,007 1.43% $10,143 2.44% $10,244
6/30/89 $10,280 8.04% $10,811 8.83% $11,039 5.51% $10,809
9/30/89 $10,460 0.94% $10,913 10.71% $12,221 3.99% $11,240
12/31/89 $10,900 3.61% $11,307 2.06% $12,473 1.38% $11,395
3/31/90 $10,693 -1.14% $11,178 -3.01% $12,097 -1.80% $11,190
6/30/90 $11,030 3.60% $11,580 6.29% $12,858 3.02% $11,528
9/30/90 $10,101 0.60% $11,650 -13.74% $11,092 -5.42% $10,903
12/31/90 $10,091 5.10% $12,244 8.96% $12,085 4.44% $11,387
3/31/91 $11,754 2.69% $12,573 14.53% $13,841 8.67% $12,374
6/30/91 $12,452 1.51% $12,763 -0.23% $13,809 1.78% $12,595
9/30/91 $13,448 5.75% $13,497 5.35% $14,548 6.88% $13,461
12/31/91 $13,999 5.33% $14,216 8.38% $15,767 5.51% $14,203
3/31/92 $14,935 -1.50% $14,003 -2.53% $15,369 1.05% $14,352
6/30/92 $15,515 4.06% $14,572 1.90% $15,661 2.96% $14,777
9/30/92 $15,855 4.88% $15,283 3.15% $16,154 3.54% $15,300
12/31/92 $15,983 0.07% $15,293 5.03% $16,966 1.94% $15,597
3/31/93 $16,979 4.66% $16,006 4.37% $17,708 5.12% $16,395
6/30/93 $17,671 3.01% $16,488 0.49% $17,795 2.24% $16,763
9/30/93 $18,367 3.32% $17,035 2.58% $18,254 3.24% $17,306
12/31/93 $18,954 -0.29% $16,986 2.32% $18,677 1.04% $17,486
3/31/94 $18,151 -3.15% $16,451 -3.79% $17,969 -3.07% $16,949
6/30/94 $17,843 -1.24% $16,247 0.42% $18,045 -0.41% $16,879
9/30/94 $18,202 0.50% $16,328 4.89% $18,927 2.04% $17,224
12/31/94 $17,766 0.37% $16,388 -0.02% $18,923 -1.37% $16,988
3/31/95 $18,498 4.98% $17,204 9.74% $20,767 5.57% $17,934
6/30/95 $19,910 6.48% $18,319 9.55% $22,750 6.01% $19,012
9/30/95 $20,847 1.91% $18,669 7.95% $24,558 4.71% $19,907
12/31/95 $21,745 4.66% $19,539 6.02% $26,037 4.49% $20,801
3/31/96 $21,983 -2.34% $19,082 5.37% $27,435 1.92% $21,200
6/30/96 $22,623 0.47% $19,172 4.49% $28,667 1.82% $21,586
9/30/96 $23,003 1.77% $19,511 3.09% $29,553 1.96% $22,009
12/31/96 $24,198 3.06% $20,108 8.34% $32,017 4.72% $23,048
3/31/97 $24,395 -0.86% $19,935 2.68% $32,875 -0.05% $23,037
6/30/97 $25,804 3.64% $20,661 17.46% $38,615 7.86% $24,847
9/30/97 $27,145 3.50% $21,384 7.49% $41,508 6.02% $26,343
12/31/97 $28,333 3.21% $22,070 2.87% $42,699 1.73% $26,799
3/31/98 $29,366 1.52% $22,406 13.95% $48,655 5.39% $28,243
6/30/98 $28,696 2.62% $22,993 3.30% $50,261 0.40% $28,356
9/30/98 $28,049 4.95% $24,131 -9.95% $45,260 -4.53% $27,072
12/31/98 $28,798 0.13% $24,162 21.30% $54,894 6.46% $28,821
</TABLE>
MUTUAL SHARES SECURITIES FUND
Value investors generally, and we at Mutual Shares Securities Fund,
underperformed the various broad market indices over the reporting period, as
shown by our +.09% cumulative total return for the year ended December 31, 1998.
Large-cap value stocks, which have typically held up better than growth stocks
in market downturns, generally did not do so during last summer's two-month
market correction. The S&P
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
38
<PAGE>
500's largest growth stocks, such as Microsoft Corp., Dell Corp. and Intel
Corp., continued their extraordinary growth, pushing the major indices to record
levels. Internet stocks traded at levels that confounded even traditional growth
investors. Some perceived pockets of value, such as oil service companies, just
got cheaper over the course of the year. We feel the relatively weak performance
of value stocks contributed to the flat performance of the portfolio over the
period.
Some of our largest positions did perform well during the year. Mediaone Group
Inc. and Morgan Stanley Dean Witter & Co. were up significantly. Financial
services stocks remained a major portfolio focus. During the third-quarter
correction we made a significant investment in the brokerage sector, initiating
positions in Lehman Brothers Holdings Inc. and Bear Stearns Co. Inc., and adding
to our Morgan Stanley Dean Witter holdings. We bought our Lehman stock at a
notable discount to book value during a period when some believed the company,
with $5 billion of equity capital, was financially strapped. We were also
enthusiastic about Bank One Corp. and money manager United Asset Management
Corp., two other financial holdings.
Companies involved in deals and restructurings should again present
opportunities in 1999. Two businesses we liked, and where we added to our
holdings, were Telephone & Data Systems Inc., a wireless and wireline
telecommunication company, and diversified consumer products company U.S.
Industries Inc. Looking forward, we are confident that our disciplined value and
special situation approach, although recently out of favor, will prove
rewarding.
Effective November 1, 1998, Larry Sondike and David Marcus assumed their roles
as portfolio co-managers. This change is designed to combine the benefits of our
team approach with the increased focus and accountability that portfolio
assignments create. The managers will continue to benefit from the ideas of all
the investment professionals at the firm.
GRAPHIC MATERIAL (44)
This graph compares the performance of Mutual Shares Securities Fund as tracked
by the growth in value of a $10,000 investment, to that of S&P 500 Index, and
the Lipper Growth & Income Funds Objective Advantage Index from
11/8/96-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sale
scharges. Index source is Standard & Poor's Micropal and Lipper.
TOTAL RETURN INDEX COMPARISON
Mutual Shares Securities Fund
$10,000 Investment (11/8/96 - 12/31/98)
<TABLE>
<CAPTION>
Mutual Shares Securities Fund S&P500 Lipper Growth &
Income Funds
Objective Average
<S> <C> <C> <C> <C> <C> <C>
11/8/96 $10,000 $10,000 $10,000
11/30/96 $10,120 5.54% $10,554 4.77% $10,477
12/31/96 $10,350 -1.98% $10,345 -1.05% $10,367
1/31/97 $10,620 6.25% $10,992 4.31% $10,813
2/28/97 $10,730 0.78% $11,078 0.51% $10,869
3/31/97 $10,420 -4.11% $10,622 -3.57% $10,481
4/30/97 $10,510 5.97% $11,257 3.60% $10,858
5/31/97 $10,890 6.09% $11,942 6.26% $11,538
6/30/97 $11,145 4.48% $12,477 3.85% $11,982
7/31/97 $11,685 7.96% $13,470 7.36% $12,864
8/31/97 $11,625 -5.60% $12,716 -3.34% $12,434
9/30/97 $12,115 5.48% $13,413 5.07% $13,064
10/31/97 $11,805 -3.34% $12,965 -3.51% $12,606
11/30/97 $11,915 4.63% $13,565 2.68% $12,944
12/31/97 $12,185 1.72% $13,798 1.67% $13,160
1/31/98 $12,135 1.11% $13,952 0.07% $13,169
2/28/98 $12,786 7.21% $14,958 6.82% $14,067
3/31/98 $13,196 5.12% $15,723 4.42% $14,689
4/30/98 $13,316 1.01% $15,882 0.70% $14,792
5/31/98 $13,196 -1.72% $15,609 -2.08% $14,484
6/30/98 $13,114 4.06% $16,243 1.69% $14,729
7/31/98 $12,655 -1.07% $16,069 -2.59% $14,347
8/31/98 $10,840 -14.46% $13,745 -14.66% $12,244
9/30/98 $10,799 6.41% $14,626 5.29% $12,892
10/31/98 $11,513 8.13% $15,816 7.25% $13,826
11/30/98 $12,104 6.06% $16,774 5.07% $14,527
12/31/98 $12,196 0.76% 5.76% $17,740 4.46% $15,175
</TABLE>
GRAPHIC MATERIAL (45)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Mutual Shares
Securities Fund.
TOP 10 HOLDINGS
Mutual Shares Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Chase Manhattan Corp. 3.7%
Banking, U.S.
Investor AB, A&B 3.2%
Multi-Industry, Sweden
Morgan Stanley
Dean Witter & Co. 2.0%
Financial Services, U.S.
United Asset Management Corp. 2.0%
Financial Services, U.S.
Mediaone Group Inc. 1.9%
Broadcasting & Publishing, U.S.
Bank One Corp. 1.9%
Banking, U.S.
General Motors Corp. 1.8%
Automobiles, U.S.
RJR Nabisco Holdings Corp. 1.7%
Beverages & Tobacco, U.S.
Tele-Communications Inc., A 1.6%
Telecommunications, U.S.
Suez Lyonnaise des Eaux SA 1.6%
Business & Public Services,
France
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE STANDARD & POOR'S MICROPAL AND LIPPER.
GRAPHIC MATERIAL (46)
This chart shows the average annual total return for the Mutual Shares
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------------
<S> <C>
1-Year +0.09%
Since Inception (11/8/96) +9.70%
</TABLE>
39
<PAGE>
GRAPHIC MATERIAL (47)
This chart shows the top 10 holdings and their respective security type based
on the percentage of total net assets on 12/31/98 for the Real Estate
Securities Fund.
TOP 10 HOLDINGS
Real Estate Securities Fund
12/31/98
<TABLE>
<CAPTION>
SECURITY % OF TOTAL
SECURITY TYPE NET ASSETS
- ----------------------------------------------------
<S> <C>
Equity Residential
Properties Trust 3.67%
Equity REIT - Apartments
Security Capital Group Inc. 3.44%
Diversified Property Type
Equity Office Properties Trust 3.37%
Equity REIT - Office
Pacific Retail Trust 3.28%
Equity REIT - Retail -
Community Centers
Arden Realty Inc. 3.13%
Equity REIT - Office
Simon Property Group Inc. 3.03%
Equity REIT - Retail -
Regional Malls
FelCor Lodging Trust Inc. 2.94%
Equity REIT - Hotels
Archstone Communities Trust 2.87%
Equity REIT - Apartments
Starwood Hotels & Resorts
Worldwide Inc. 2.81%
Equity REIT - Hotels
Host Marriott Corp. 2.79%
Hotels
</TABLE>
REAL ESTATE SECURITIES FUND
During the 12-month reporting period, the real estate industry benefited from
strong operating fundamentals and low interest rates. Unfortunately, the
sector's stock performance was a different story. After strong returns in 1997,
real estate securities suffered a substantial decline in 1998. Real estate
investment trusts' (REITs') inability to access the capital markets apparently
fueled concerns about a slowdown in acquisition activity, which, along with
uncertainty about the U.S. economy, negatively affected investor sentiment and
contributed to weak REIT stock prices. The 1998 real estate sector was in our
opinion a clear example of negative investor sentiment overriding operating
fundamentals. While we cannot predict future market direction, we believe that
1999 earnings visibility may be excellent for the real estate industry relative
to the overall market, given strong sector fundamentals and stable cash flows
derived from real estate leases. Additionally, as a result of lower stock
prices, REITs traded at the most attractive valuations seen in the last several
years.
For the year under review, Real Estate Securities Fund delivered a -16.82%
cumulative total return, comparable to the portfolio's benchmark, the unmanaged
Wilshire Real Estate Securities Index, which posted a -17.63% total return for
the same period. However, the fund substantially underperformed the S&P 500
Index, which consists of 500 widely held U.S. common stocks and had a return of
28.6% for the period, reflecting investors preference for large-cap stocks at
the expense of real estate securities.*
As discussed in prior shareholder reports, our portfolio strategy is to focus on
property types and geographic regions with strong supply and demand
fundamentals, while attempting to identify those management teams with intensive
property management and capital markets experience. Accordingly, we maintained
the majority of our investments in the diversified, hotel, apartment, office and
industrial property sectors, where we saw the most attractive stock valuations
and anticipated the strongest cash flow growth.
The diversified property sector represented the portfolio's largest property
type-weighting, representing 20.0% of total net assets on December 31, 1998.
This sector's stocks have real estate portfolios diversified by property type
and location. We recently added to two of the group's positions, Security
Capital Group Inc. and Glenborough
*Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
40
<PAGE>
Realty Trust Inc., placing them among our top 15 portfolio holdings. We felt
these stocks' weakness at the end of the reporting period provided an excellent
opportunity to increase our position in these well-managed, highly diversified
companies.
Given the reduced domestic economic risk, we believe that office stocks
represent an attractive combination of favorable supply and demand fundamentals
and attractive valuations. As of December 31, 1998, the office sector
represented 18.1% of total net assets. The portfolio initiated positions in two
new stocks, Brandywine Realty Trust, a suburban Philadelphia office REIT, and
TriNet Corporate Realty Trust Inc., a national triple net lease office REIT. At
the purchase date, both stocks traded at seven times 1999 expected funds from
operations (FFO) and offered dividend yields in excess of 9%.
Our third largest property sector, hotels, represented 17.4% of total net assets
at year end. Changing legislation, concerns about excess supply and a potential
recession seemed to hit this group the hardest in 1998. We took advantage of
this weakness to add to three positions -- Starwood Hotels & Resorts Worldwide
Inc., MeriStar Hospitality Corp., and Host Marriott Corp. -- which also took
their place among our largest positions. Hotel stocks may benefit from the
Federal Reserve Board's interest-rate cuts and the recent credit crunch, which
in our view would significantly reduce the amount of new industry construction.
We believe these companies, offering compelling valuations at the time of
purchase, should retain their excellent growth prospects under any corporate
structure.
The portfolio's homebuilding and manufactured homes sectors significantly
outperformed the overall real estate market during the past year. This superior
performance mainly resulted from lower interest rates and record home-buying
levels across the country, in our view. Consequently, the homebuilders continued
to trade at relatively high valuations, leading us to sell our remaining
positions in this sector, including Cavalier Homes Inc., Clayton Homes Inc. and
Southern Energy Homes Inc.
Looking ahead, the unique combination of steady growth and favorable valuations
in the current market sustains our enthusiasm for investing in REITs. We remain
committed to real estate stocks and REITs, as this market sector grows in
capitalization
WHAT IS A TRIPLE NET LEASE?
A lease that stipulates that the tenant, and not the landlord, is responsible
for all costs including maintenance, taxes and insurance.
41
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (49)
This chart shows the average annual total return for the Real Estate Securities
Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ------------------------------------------
<S> <C>
1-Year -16.82%
5-Year +10.03%
Since Inception (1/24/89) +10.30%
</TABLE>
and diversity. In addition to our direct experience in real estate and real
estate securities management, we are well-positioned with our team of over 30
equity and credit analysts to evaluate the merits of the new REITs being formed
by a variety of U.S. corporations. Going forward, we will maintain our focus on
top-quality real estate companies that create significant cash flow growth and
shareholder value.
GRAPHIC MATERIAL (48)
This graph compares the performance of Real Estate Securities Fund as tracked by
the growth in value of a $10,000 investment, to that of S&P 500 Index, and the
Wilshire Real Estate Securities Index from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Real Estate Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Real Estate Securities S&P 500 Wilshire Real Estate
Securities Index
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000
1/31/89 $10,020 $ 10,165 1.65% $ 10,037 0.37%
2/28/89 $10,080 $ 9,912 -2.49% $ 10,063 0.26%
3/31/89 $10,150 $ 10,143 2.33% $ 10,133 0.70%
4/30/89 $10,220 $ 10,670 5.19% $ 10,318 1.82%
5/31/89 $10,290 $ 11,102 4.05% $ 10,495 1.72%
6/30/89 $10,540 $ 11,038 -0.57% $ 10,613 1.12%
7/31/89 $10,850 $ 12,035 9.03% $ 10,948 3.16%
8/31/89 $10,990 $ 12,271 1.96% $ 10,832 -1.06%
9/30/89 $10,750 $ 12,221 -0.41% $ 10,808 -0.22%
10/31/89 $10,450 $ 11,937 -2.32% $ 10,268 -5.00%
11/30/89 $10,490 $ 12,181 2.04% $ 10,115 -1.49%
12/31/89 $10,480 $ 12,473 2.40% $ 10,111 -0.04%
1/31/90 $10,170 $ 11,636 -6.71% $ 9,634 -4.71%
2/28/90 $10,150 $ 11,786 1.29% $ 9,631 -0.04%
3/31/90 $10,249 $ 12,099 2.65% $ 9,608 -0.23%
4/30/90 $10,107 $ 11,797 -2.49% $ 9,422 -1.94%
5/31/90 $10,178 $ 12,948 9.75% $ 9,381 -0.44%
6/30/90 $10,259 $ 12,861 -0.67% $ 9,398 0.19%
7/31/90 $10,137 $ 12,820 -0.32% $ 9,038 -3.83%
8/31/90 $9,427 $ 11,661 -9.04% $ 7,983 -11.68%
9/30/90 $8,808 $ 11,093 -4.87% $ 7,058 -11.59%
10/31/90 $8,564 $ 11,045 -0.43% $ 6,549 -7.20%
11/30/90 $9,102 $ 11,759 6.46% $ 6,816 4.07%
12/31/90 $9,224 $ 12,087 2.79% $ 6,728 -1.29%
1/31/91 $10,158 $ 12,614 4.36% $ 7,383 9.73%
2/28/91 $10,381 $ 13,516 7.15% $ 7,817 5.88%
3/31/91 $11,081 $ 13,843 2.42% $ 8,513 8.91%
4/30/91 $11,274 $ 13,876 0.24% $ 8,444 -0.81%
5/31/91 $11,406 $ 14,474 4.31% $ 8,575 1.55%
6/30/91 $11,096 $ 13,811 -4.58% $ 8,152 -4.93%
7/31/91 $11,233 $ 14,455 4.66% $ 8,118 -0.42%
8/31/91 $11,191 $ 14,797 2.37% $ 8,020 -1.21%
9/30/91 $11,413 $ 14,550 -1.67% $ 7,928 -1.14%
10/31/91 $11,265 $ 14,745 1.34% $ 7,750 -2.25%
11/30/91 $11,180 $ 14,151 -4.03% $ 7,493 -3.32%
12/31/91 $11,909 $ 15,770 11.44% $ 8,076 7.78%
1/31/92 $12,987 $ 15,476 -1.86% $ 8,456 4.71%
2/29/92 $12,628 $ 15,676 1.29% $ 8,435 -0.25%
3/31/92 $12,396 $ 15,370 -1.95% $ 8,253 -2.16%
4/30/92 $12,216 $ 15,822 2.94% $ 8,116 -1.66%
5/31/92 $12,501 $ 15,900 0.49% $ 8,148 0.40%
6/30/92 $12,390 $ 15,663 -1.49% $ 7,903 -3.01%
7/31/92 $12,886 $ 16,303 4.09% $ 7,932 0.37%
8/31/92 $12,746 $ 15,969 -2.05% $ 7,812 -1.51%
9/30/92 $12,929 $ 16,156 1.17% $ 8,109 3.80%
10/31/92 $13,135 $ 16,211 0.34% $ 8,196 1.07%
11/30/92 $13,286 $ 16,762 3.40% $ 8,267 0.86%
12/31/92 $13,804 $ 16,968 1.23% $ 8,673 4.92%
1/31/93 $14,365 $ 17,111 0.84% $ 9,276 6.95%
2/28/93 $14,883 $ 17,344 1.36% $ 9,725 4.84%
3/31/93 $15,854 $ 17,710 2.11% $ 10,378 6.71%
4/30/93 $15,228 $ 17,281 -2.42% $ 9,789 -5.67%
5/31/93 $15,099 $ 17,742 2.67% $ 9,635 -1.57%
6/30/93 $15,619 $ 17,794 0.29% $ 9,888 2.62%
7/31/93 $15,925 $ 17,723 -0.40% $ 10,089 2.03%
8/31/93 $16,351 $ 18,394 3.79% $ 10,298 2.08%
9/30/93 $17,192 $ 18,253 -0.77% $ 10,765 4.53%
10/31/93 $17,072 $ 18,631 2.07% $ 10,463 -2.81%
11/30/93 $16,013 $ 18,454 -0.95% $ 10,006 -4.36%
12/31/93 $16,428 $ 18,677 1.21% $ 9,994 -0.12%
1/31/94 $16,723 $ 19,312 3.40% $ 10,294 3.00%
2/28/94 $17,411 $ 18,789 -2.71% $ 10,715 4.09%
3/31/94 $16,799 $ 17,969 -4.36% $ 10,219 -4.63%
4/30/94 $17,072 $ 18,199 1.28% $ 10,334 1.12%
5/31/94 $17,334 $ 18,498 1.64% $ 10,548 2.08%
6/30/94 $16,965 $ 18,045 -2.45% $ 10,341 -1.97%
7/31/94 $16,932 $ 18,637 3.28% $ 10,364 0.23%
8/31/94 $16,876 $ 19,401 4.10% $ 10,357 -0.07%
9/30/94 $16,600 $ 18,927 -2.44% $ 10,184 -1.67%
10/31/94 $16,009 $ 19,353 2.25% $ 9,811 -3.66%
11/30/94 $15,435 $ 18,649 -3.64% $ 9,428 -3.91%
12/31/94 $16,903 $ 18,925 1.48% $ 10,159 7.75%
1/31/95 $16,285 $ 19,415 2.59% $ 9,830 -3.23%
2/28/95 $16,572 $ 20,172 3.90% $ 10,138 3.13%
3/31/95 $16,693 $ 20,767 2.95% $ 10,197 0.58%
4/30/95 $16,649 $ 21,378 2.94% $ 10,123 -0.72%
5/31/95 $17,323 $ 22,233 4.00% $ 10,459 3.31%
6/30/95 $17,616 $ 22,748 2.32% $ 10,641 1.74%
7/31/95 $17,982 $ 23,504 3.32% $ 10,812 1.61%
8/31/95 $18,370 $ 23,563 0.25% $ 10,944 1.22%
9/30/95 $18,895 $ 24,557 4.22% $ 11,145 1.84%
10/31/95 $18,507 $ 24,468 -0.36% $ 10,800 -3.10%
11/30/95 $18,815 $ 25,543 4.39% $ 10,912 1.04%
12/31/95 $19,865 $ 26,036 1.93% $ 11,545 5.80%
1/31/96 $20,311 $ 26,921 3.40% $ 11,704 1.38%
2/29/96 $20,573 $ 27,171 0.93% $ 11,936 1.98%
3/31/96 $20,596 $ 27,432 0.96% $ 12,033 0.81%
4/30/96 $20,653 $ 27,835 1.47% $ 12,087 0.45%
5/31/96 $21,064 $ 28,553 2.58% $ 12,356 2.23%
6/30/96 $21,291 $ 28,662 0.38% $ 12,603 2.00%
7/31/96 $21,124 $ 27,395 -4.42% $ 12,491 -0.89%
8/31/96 $22,135 $ 27,973 2.11% $ 13,022 4.25%
9/30/96 $22,835 $ 29,548 5.63% $ 13,348 2.50%
10/31/96 $23,288 $ 30,363 2.76% $ 13,709 2.71%
11/30/96 $24,050 $ 32,659 7.56% $ 14,278 4.15%
12/31/96 $26,385 $ 32,012 -1.98% $ 15,802 10.67%
1/31/97 $26,718 $ 34,013 6.25% $ 16,028 1.43%
2/28/97 $26,683 $ 34,278 0.78% $ 16,037 0.06%
3/31/97 $26,885 $ 32,870 -4.11% $ 16,092 0.34%
4/30/97 $26,194 $ 34,832 5.97% $ 15,572 -3.23%
5/31/97 $27,147 $ 36,953 6.09% $ 16,036 2.98%
6/30/97 $28,388 $ 38,609 4.48% $ 16,832 4.96%
7/31/97 $29,159 $ 41,682 7.96% $ 17,385 3.29%
8/31/97 $29,122 $ 39,348 -5.60% $ 17,257 -0.74%
9/30/97 $31,958 $ 41,504 5.48% $ 18,958 9.86%
10/31/97 $30,764 $ 40,118 -3.34% $ 18,152 -4.25%
11/30/97 $31,311 $ 41,975 4.63% $ 18,517 2.01%
12/31/97 $31,846 $ 42,697 1.72% $ 18,930 2.23%
1/31/98 $31,498 $ 43,171 1.11% $ 18,663 -1.41%
2/28/98 $31,336 $ 46,284 7.21% $ 18,424 -1.28%
3/31/98 $32,008 $ 48,653 5.12% $ 18,787 1.97%
4/30/98 $31,137 $ 49,145 1.01% $ 18,196 -3.15%
5/31/98 $30,826 $ 48,300 -1.72% $ 18,021 -0.96%
6/30/98 $30,412 $ 50,260 4.06% $ 17,925 -0.53%
7/31/98 $28,312 $ 49,723 -1.07% $ 16,678 -6.96%
8/31/98 $25,335 $ 42,533 -14.46% $ 14,945 -10.39%
9/30/98 $26,690 $ 45,259 6.41% $ 15,782 5.60%
10/31/98 $26,265 $ 48,939 8.13% $ 15,566 -1.37%
11/30/98 $26,651 $ 51,904 6.06% $ 15,858 1.88%
12/31/98 $26,491 -0.60% $ 54,894 5.76% $ 15,594 -1.67%
</TABLE>
RISING DIVIDENDS FUND
We base our investment strategy on the belief that companies with consistently
rising dividends should, over time, also realize stock price appreciation. We
select portfolio securities based on several criteria: consistent and
substantial dividend increases, strong balance sheets and relatively low
price-earnings ratios. We seek fundamentally sound companies that meet our
standards and attempt to acquire them at attractive prices, often when they are
out of favor with other investors.
As discussed in our semiannual report, we believe the soft global economy
negatively impacted the U.S. economy's manufacturing sector, but actually helped
the consumer sector. Global weakness played an important role in contributing to
inflation's decline, as well as being a factor in enabling consumer interest
rates, such as mortgage rates, to fall. As a result, in our view of these
developments, consumer spending remained strong, while many manufacturers
suffered through near-recessionary conditions, and most consumer-oriented stocks
performed better than manufacturers' stocks.
Three of the portfolio's 1998 top-five performing holdings were retailers, led
by Wal-Mart Stores Inc., which more than doubled during the year. Other
retailers
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
42
<PAGE>
having exceptional performance were Family Dollar Stores Inc., the portfolio's
largest position, and Rite Aid Corp., a leading national drugstore chain. During
the year, all three companies enjoyed strong sales growth at the individual
store level, while successfully expanding or renovating their store base.
Becton, Dickinson and Co. and Myers Industries Inc. were two other strong
performers during the reporting period. Becton, Dickinson increased sales
growth, largely through a series of complementary acquisitions. Myers benefited
from lower resin prices in 1998, compared with 1997. Also, late in the year,
Myers made what we felt to be a very attractive acquisition, which considerably
enhanced the company's prospects in Europe.
Most of the worst-performing stocks during the year were already highlighted in
the semiannual report. These were mainly smaller, manufacturing-oriented
companies such as Flowserve Corp., M. A. Hanna Co. and Watts Industries Inc. The
industrial slowdown negatively impacted them, causing them to report weaker than
expected quarterly earnings. DIMON Inc., a tobacco leaf processor, also
continued to disappoint and was forced to cut its dividend in November.
Teleflex Inc., a diversified manufacturer of products and services for the
aerospace, automotive, marine, medical, and industrial markets, was a
significant portfolio addition. As of the end of the reporting period, it had a
remarkable record of 23 consecutive years of revenue and earnings growth, in
addition to 21 years of dividend growth. Two other positions we added to the
portfolio were Diebold Inc. and Reynolds and Reynolds Co. Diebold, a well known
automated teller machine manufacturer, has increased its dividend for an
exceptional 45 straight years. Reynolds and Reynolds is a leading provider of
information management systems primarily used by automobile dealerships.
Positions we added to during the year included Pall Corp., Bemis Co. Inc., West
Co. Inc., Leggett & Platt Inc. and ReliaStar Financial Corp. Pall, which has
increased its dividend for 24 years, makes filtration devices for a variety of
industries with a particular emphasis on blood filtration products. Bemis, a
manufacturer of flexible packaging for the food industry, has increased its
dividend for 14 years. West, which after year-end changed its name to West
Pharmaceutical Services, provides a variety of products and services to the
pharmaceutical industry. Leggett & Platt, a leading manufacturer of furniture
components and commercial fixtures, has increased its dividend for 27 years.
ReliaStar, a provider of a broad range of insurance related investment products,
has 27 years of dividend increases.
GRAPHIC MATERIAL (50)
This chart shows the top 10 holdings and their respective industry based on the
percentage of total net assets on 12/31/98 for the Rising Dividends Fund.
TOP 10 HOLDINGS
Rising Dividends Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------
<S> <C>
Family Dollar Stores Inc. 6.52%
Retail Trade
Pall Corp. 4.50%
Process Industries
West Co. Inc. 3.72%
Health Technology
Wallace Computer
Services Inc. 3.35%
Commercial Services
Leggett & Platt Inc. 3.07%
Consumer Durables
Bemis Co. Inc. 2.70%
Process Industries
ReliaStar Financial Corp. 2.60%
Insurance
Kaydon Corp. 2.59%
Producer Manufacturing
Alberto-Culver Co. 2.53%
Consumer Non-Durables
First Union Corp. 2.51%
Finance
</TABLE>
43
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPH MATERIAL (52)
This chart shows the average annual total return for the Rising Dividends Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year +6.92%
5-Year +17.06%
Since Inception (1/27/92) +12.98%
</TABLE>
Portfolio positions we eliminated included Allied Group, Inc.; Merck & Co.,
Inc.; Nike, Inc. and Rockwell International Corp. Allied Group was acquired by
Nationwide Mutual Insurance Co. We sold Merck as it became less attractively
valued than other alternative investments. Nike's operating results suffered as
falling demand for its products led to excess inventory, and Rockwell no longer
met the portfolio's dividend requirement.
Notable dividend increases over the reporting period came from National Commerce
Bancorp. (+38.5%), First Union Corp. (+27%), Mercury General Corp. (+20.7%),
Alberto-Culver Co. (+20%), Myers Industries, Inc. (+20%) and ReliaStar Financial
Corp. (+19.4%).
As shown on the table on page 43, our 10 largest positions on December 31, 1998,
comprised 34.1% of the fund's total net assets. The following statistical
average demonstrates how these companies would, in the aggregate, respond to the
fund's screening criteria. On average, these 10 companies have raised their
dividends 19 years in a row, and by 283% in the last 10 years. Their most recent
dividend increases averaged 13.5%, for a yield of 1.8% on December 31, 1998, and
a dividend payout ratio of 34%. Long-term debt averaged 23% of capitalization,
and the average price-earnings ratio was 19.8 versus 27.2 for that of the
unmanaged Standard & Poor's 500 Stock Index on the same date. In our opinion,
these companies represent the portfolio's high quality from a fundamental
standpoint. We also believe that, over the long haul, companies that increase
cash payments to shareholders, year after year, may be superior builders of
wealth.
TOTAL RETURN INDEX COMPARISON
Rising Dividends Fund
$10,000 Investment (1/27/92 - 12/31/98)
GRAPHIC MATERIAL (51)
This graph compares the performance of Rising Dividends Fund as tracked by the
growth in value of a $10,000 investment, to that of Wilshire Mid Cap Company
Growth Index from 1/27/92 - 12/31/98.
GRAPHIC MATERIAL (51)
This graph compares the performance of Rising Dividends Fund as tracked by the
growth in value of a $10,000 investment, to that of Wilshire Mid Cap Company
growth Index from 1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
<TABLE>
<CAPTION>
Rising Dividends Wilshire MidCap
Growth Index
<S> <C> <C> <C> <C>
1/27/92 $10,000 $ 10,000
1/31/92 $10,000 0.39% $ 10,039
2/29/92 $10,000 1.69% $ 10,208
3/31/92 $9,930 -3.99% $ 9,801
4/30/92 $9,980 -2.38% $ 9,568
5/31/92 $10,130 -1.25% $ 9,448
6/30/92 $9,990 -4.54% $ 9,019
7/31/92 $10,350 5.48% $ 9,513
8/31/92 $10,240 -2.09% $ 9,315
9/30/92 $10,410 1.75% $ 9,478
10/31/92 $10,540 4.08% $ 9,864
11/30/92 $10,860 7.66% $ 10,620
12/31/92 $10,980 3.06% $ 10,945
1/31/93 $10,860 2.26% $ 11,192
2/28/93 $10,670 -3.37% $ 10,815
3/31/93 $10,760 3.07% $ 11,147
4/30/93 $10,390 -4.18% $ 10,681
5/31/93 $10,530 5.70% $ 11,290
6/30/93 $10,418 0.66% $ 11,364
7/31/93 $10,418 -0.89% $ 11,263
8/31/93 $10,588 5.07% $ 11,834
9/30/93 $10,588 2.51% $ 12,131
10/31/93 $10,749 0.53% $ 12,196
11/30/93 $10,478 -1.56% $ 12,005
12/31/93 $10,598 5.53% $ 12,669
1/31/94 $10,739 3.53% $ 13,116
2/28/94 $10,378 0.53% $ 13,186
3/31/94 $9,916 -5.95% $ 12,401
4/30/94 $9,936 0.40% $ 12,451
5/31/94 $10,077 -1.53% $ 12,261
6/30/94 $10,050 -5.04% $ 11,643
7/31/94 $10,152 2.44% $ 11,927
8/31/94 $10,580 8.56% $ 12,948
9/30/94 $10,335 -0.79% $ 12,845
10/31/94 $10,309 2.44% $ 13,159
11/30/94 $10,064 -4.43% $ 12,576
12/31/94 $10,166 1.66% $ 12,785
1/31/95 $10,441 0.02% $ 12,787
2/28/95 $10,747 6.00% $ 13,554
3/31/95 $10,982 3.69% $ 14,055
4/30/95 $11,063 1.49% $ 14,264
5/31/95 $11,441 1.64% $ 14,498
6/30/95 $11,564 6.29% $ 15,410
7/31/95 $11,814 8.40% $ 16,704
8/31/95 $12,012 1.53% $ 16,960
9/30/95 $12,408 2.79% $ 17,433
10/31/95 $12,304 -3.52% $ 16,819
11/30/95 $12,939 5.25% $ 17,702
12/31/95 $13,190 0.36% $ 17,766
1/31/96 $13,450 1.73% $ 18,073
2/29/96 $13,648 3.74% $ 18,749
3/31/96 $13,648 1.21% $ 18,976
4/30/96 $13,617 5.93% $ 20,102
5/31/96 $13,992 2.99% $ 20,703
6/30/96 $14,145 -5.45% $ 19,574
7/31/96 $13,731 -8.56% $ 17,899
8/31/96 $14,007 7.29% $ 19,204
9/30/96 $14,730 4.73% $ 20,112
10/31/96 $15,166 -2.83% $ 19,543
11/30/96 $16,219 5.63% $ 20,643
12/31/96 $16,379 -1.32% $ 20,370
1/31/97 $16,709 2.90% $ 20,961
2/28/97 $17,177 -1.89% $ 20,565
3/31/97 $16,645 -6.11% $ 19,309
4/30/97 $17,070 3.42% $ 19,969
5/31/97 $18,389 8.27% $ 21,620
6/30/97 $19,054 3.47% $ 22,371
7/31/97 $20,670 7.07% $ 23,952
8/31/97 $20,250 -0.77% $ 23,768
9/30/97 $21,312 6.58% $ 25,332
10/31/97 $20,792 -4.77% $ 24,123
11/30/97 $21,290 0.59% $ 24,266
12/31/97 $21,789 0.85% $ 24,472
1/31/98 $21,689 -0.70% $ 24,301
2/28/98 $23,438 8.24% $ 26,303
3/31/98 $24,113 1.60% $ 26,724
4/30/98 $24,036 0.70% $ 26,911
5/31/98 $23,161 -5.62% $ 25,398
6/30/98 $22,898 -0.60% $ 25,246
7/31/98 $22,113 -5.94% $ 23,746
8/31/98 $18,589 -20.29% $ 18,928
9/30/98 $19,515 4.95% $ 19,865
10/31/98 $21,599 7.91% $ 21,437
11/30/98 $22,383 5.78% $ 22,676
12/31/98 $23,297 4.08% 6.76% $ 24,208
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
44
<PAGE>
TEMPLETON GLOBAL ASSET ALLOCATION FUND
In the U.S., we believe that interest rates and earnings primarily drove stock
market valuations and have little doubt that it was lower interest rates that
dominated equity markets in 1998. The catalyst for lower rates was widely
believed to come from an unusual source: Russia's Treasury default and
subsequent currency devaluation in August 1998, which prompted a domino effect
through emerging markets and culminated in the bailout of a major hedge fund.
This set the stage for the Federal Reserve Board to cut the federal funds target
rate three times in the fall, to 4.75%, to stimulate growth. After September's
sharp decline, the liquidity surge resulting from the rate cuts helped propel
the S&P 500 to new highs in fourth quarter 1998.
Looking ahead, we believe investors will be disappointed by the American
market's equity returns, considering the stretched valuations and poor earnings
outlook we see as of December 31, 1998. We expect 1998 earnings growth for the
S&P 500 will turn out to have been flat, and attribute equity returns of over
20% entirely to the price-to-earnings (P/E) multiples' expansion from 24.5 to
32. Previously reported corporate profits trended down from S&P second quarter
1998 profits, up only 4%, to third quarter profits, which were down 3%. Although
the U.S. remained our largest single country weighting, we were underweight in
U.S. equities versus the other benchmarks, preferring to invest in other regions
where companies trade at lower multiples. The average P/E ratio for the
portfolio's U.S. holdings was only 16.1 at the end of the reporting period. We
took advantage of price strength to eliminate our positions in three highly
rated stocks: IBM Corp., Merrill Lynch & Co. Inc. and Morgan Stanley Dean Witter
& Co. At the same time we were able to find new bargains in defense company
Raytheon Co. and disability provider UNUM Corp.
European stock markets started 1998 off with a bang, as investors marked up
equity prices, reportedly in anticipation of converging interest rates,
export-led economic growth and corporate restructuring. However, most of these
gains vanished abruptly in the third quarter as markets followed the U.S.
downward in response to this summer's emerging market contagion. Investors
evidently perceived Europe's banks as being highly exposed to emerging markets.
As in the U.S., European nations lowered interest rates, helping to spark
another rally across equity markets. Contrary to our outlook for the U.S., we
were optimistic regarding European prospects for 1999. We anticipate economic
growth may come from private consumption, continued corporate restructuring and
a burgeoning equity culture. The portfolio's largest European weighting remained
the U.K., with an 11.1% asset allocation at year-end. We believe
GRAPHIC MATERIAL (53)
This chart shows in pie format the asset allocation of Templeton Global Asset
Allocation Fund based on total net assets as of 12/31/98.
ASSET ALLOCATION
Templeton Global Asset Allocation Fund
Based on Total Net Assets
12/31/98
<TABLE>
<CAPTION>
<S> <C>
Equity Securities 60.4%
Fixed-Income Securities 32.5%
Short-term investments & other net assets 7.1%
</TABLE>
45
<PAGE>
TOP FIVE COUNTRY HOLDINGS
Templeton Global
Asset Allocation Fund
GRAPHIC MATERIAL (54)
This chart shows the top 5 countries based on the percentage of total net
assets on 12/31/98 for the Templeton Global Asset Allocation Fund.
<TABLE>
<CAPTION>
% OF TOTAL
12/31/98 NET ASSETS
- ---------------------------------------------------------
<S> <C>
United States 29.2%
United Kingdom 11.1%
Hong Kong 6.0%
France 5.7%
Italy 4.5%
</TABLE>
TOP FIVE INDUSTRIES
Templeton Global
Asset Association Fund
GRAPHIC MATERIAL (55)
This chart shows the top five industry breakdown based on the percentage of
total net assets on 12/31/98 for the Templeton Global Asset Allocation Fund.
<TABLE>
<CAPTION>
% OF TOTAL
12/31/98 NET ASSETS
- ---------------------------------------------------------
<S> <C>
Insurance 11.1%
Multi-Industry 6.1%
Financial Services 4.5%
Transportation 4.2%
Utilities Electrical & Gas 4.1%
</TABLE>
the U.K. market is undervalued and that corporate profits may benefit from a
weaker currency and lower interest rates. These rates, despite having been cut
three times in as many months, still remain the highest among the G7* countries.
As of December 31, 1998, our U.K. equity holdings yielded close to 6% and traded
at only 14 times 1998 earnings. New U.K. portfolio holdings include General
Electric Co. Plc., a fast growing defense and telecom company with a strong
balance sheet, as well as airplane engine manufacturer Rolls-Royce Plc.
Japanese bargains continued to elude us as we patiently waited for further bank
restructuring and appropriate fiscal policies. Japan's non-performing loans may
be as high as 30% of its gross domestic product (GDP), and the government has
been slow to restructure the sector. We don't expect to feel more optimistic
about Japan until we see tangible evidence of bank restructuring that would
include liquidation of the weaker banks and recapitalization of the stronger
banks. In our opinion, the Japanese government, having experienced four
successive quarters of negative economic growth, needs to lower income taxes to
stimulate private consumption, which makes up two-thirds of their gross domestic
product. With this in mind, we added to three Japanese retailers that we felt
were trading at undemanding valuations: Matsuzakaya Co. Ltd., Best Denki Co.
Ltd. and Laox Co. Ltd.
1998 was a disappointing year for most emerging equity and debt markets. Despite
minor Asian rallies at the beginning of the year, the defining point for this
asset class appeared to be Russia's August loan default and currency
devaluation. In the wake of these events, the third quarter International
Finance Corporation (IFC) Emerging Market Index performance was the worst on
record. The emerging market fixed-income sector was not spared, as yield spreads
rose as high as 15% above U.S. Treasuries. Although the portfolio weightings in
emerging market equities and debt securities held back performance during the
year, we remain cautiously optimistic for the future. There would appear to be
value in emerging markets with the Morgan Stanley Capital International Emerging
Markets Free (MSCI EMF) Index trading 32% off one-year highs and the index
trading on 11.5 times 1999 estimated earnings, which are expected to grow by
15%, according to Morgan Stanley Dean Witter. The crucial question remains the
timing of any recovery. We think that a few catalysts were put in place by
year-end, including lower G7* interest rates, Korean and Thai economic recovery,
continued International Monetary Fund (IMF) support for specific emerging
markets and the unwinding of hedge fund positions. With this in mind, we
purchased Bangkok Bank Public Co. Ltd. in Thailand; Hong Kong property developer
Cheung Kong Holdings Ltd.; Industrias Penoles SA, a low-cost mining company in
Mexico and Banco Bradesco SA BBD, Pfd. in Brazil.
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K., Italy and Canada.
46
<PAGE>
The fixed-income sector was marked by periodic but persistent crises in emerging
market countries, while bond yields fell in the world's major industrial
markets. Not surprisingly, emerging market bonds underperformed higher-quality
industrial market bonds during the reporting period.
Your portfolio attempted to maximize return during the period by allocating
about 83.17% of its assets to intermediate- and long-term bonds in the
industrial markets and about 16.83% of its assets to the highest quality and
most liquid bonds available in the emerging markets. The portfolio management
team believed that this combination of bonds offered the opportunity for higher
long-term returns at the cost of modestly higher short-term volatility.
We believe the three main reasons for the portfolio's weak performance in 1998
were an overweight position in emerging market debt and equity markets, an
underweight position in the U.S. and foreign currencies' weakness against the
U.S. dollar, which is the base currency for the portfolio. Also, our 32.5%
weighting in global bonds skewed performance against our comparison index, MSCI
World, which only tracks equities. We are cautiously optimistic that these
factors which have hurt performance in the past may benefit the portfolio in
1999. We have already outlined that we think there is value in emerging markets
and that the catalysts to realize this value are almost in place. We also
mentioned that we expect the U.S. markets may disappoint in 1999 due to
excessive valuations and overly optimistic earnings expectations. Finally, we
think that the U.S. dollar may weaken over the medium term as the single
European currency, the euro, gains in strength and concerns mount regarding the
U.S. trade deficit's size.
TOTAL RETURN INDEX COMPARISON
Templeton Global Asset Allocation Fund
$10,000 Investment (5/1/95 - 12/31/98)
GRAPHIC MATERIAL (56)
This graph compares the performance of Templeton Global Asset Allocation Fund
as tracked by the growth in value of a $10,000 investment, to that of the MSCI
World Index and the JP Morgan Global Government Bond Index from 5/1/95 -
12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index sources are MSCI and J.P. Morgan.
<TABLE>
<CAPTION>
Templeton Global Asset Allocation MSCI World Index JP Morgan Global Government Bond Index
Fund
<S> <C> <C> <C> <C>
5/01/95 $10,000 $10,000 $10,000
5/31/95 $10,060 $10,088 $10,279
6/30/95 $10,120 $10,086 $10,343
7/31/95 $10,330 $10,593 $10,392
8/31/95 $10,280 $10,359 $10,103
9/30/95 $10,380 $10,663 $10,331
10/31/95 $10,310 $10,497 $10,432
11/30/95 $10,420 $10,863 $10,548
12/31/95 $10,690 $11,183 $10,679
1/31/96 $11,066 $11,387 $10,569
2/29/96 $11,137 $11,458 $10,508
3/31/96 $11,208 $11,651 $10,491
4/30/96 $11,411 $11,927 $10,453
5/31/96 $11,513 $11,940 $10,463
6/30/96 $11,569 $12,002 $10,555
7/31/96 $11,396 $11,581 $10,749
8/31/96 $11,640 $11,716 $10,794
9/30/96 $11,915 $12,177 $10,853
10/31/96 $12,047 $12,264 $11,069
11/30/96 $12,587 $12,953 $11,227
12/31/96 $12,810 $12,748 $11,148
1/31/97 $13,024 $12,904 $10,870
2/28/97 $13,136 $13,054 $10,794
3/31/97 $13,055 $12,799 $10,712
4/30/97 $13,085 $13,219 $10,652
5/31/97 $13,502 $14,038 $10,903
6/30/97 $14,009 $14,739 $11,027
7/31/97 $14,760 $15,421 $10,987
8/31/97 $14,655 $14,392 $10,973
9/30/97 $15,396 $15,175 $11,217
10/31/97 $14,342 $14,379 $11,455
11/30/97 $14,228 $14,636 $11,317
12/31/97 $14,311 $14,816 $11,305
1/31/98 $14,228 $15,232 $11,418
2/28/98 $15,020 $16,265 $11,503
3/31/98 $15,531 $16,954 $11,417
4/30/98 $15,563 $17,122 $11,592
5/31/98 $15,073 $16,910 $11,642
6/30/98 $14,712 $17,314 $11,674
7/31/98 $14,802 $17,288 $11,706
8/31/98 $12,510 $14,985 $12,030
9/30/98 $12,781 $15,253 $12,658
10/31/98 $13,662 $16,635 $12,941
11/30/98 $14,192 $17,627 $12,795
12/31/98 $14,305 $18,491 $13,036
Total Return 43.05% 84.91% 30.36%
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE MSCI AND J.P. MORGAN.
GRAPHIC MATERIAL (57)
This chart shows the average annual total return for the Templeton Global Asset
Allocation Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year -0.04%
3-Year +10.20%
Since Inception (5/1/95) +10.25%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
47
<PAGE>
GRAPHIC MATERIAL (58)
This chart shows the top 10 holdings and their respective industry based on the
percentage of total net assets on 12/31/98 for the Value Securities Fund.
TOP 10 HOLDINGS
Value Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Tropical Sportswear
International Corp. 5.09%
Consumer Non-Durables
JLG Industries Inc. 2.95%
Producer Manufacturing
Superior Industries
International Inc. 2.28%
Producer Manufacturing
Tidewater Inc. 2.06%
Transportation
The Timberland Co. 2.02%
Consumer Non-Durables
Wolverine World Wide Inc. 1.84%
Consumer Non-Durables
The Reynolds & Reynolds Co. 1.78%
Commercial Services
Holophane Corp. 1.71%
Producer Manufacturing
Timken Co. 1.68%
Producer Manufacturing
Rowan Cos. Inc. 1.66%
Industrial Services
</TABLE>
VALUE SECURITIES FUND
Over the past year, the stock performance of small and large capitalization
companies was widely divergent, perhaps by the greatest amount in recent
history. This was further accentuated by the market's focus on growth rather
than value stocks. Accordingly, Value Securities Fund, with its emphasis on
small cap and value stocks, was doubly punished in the 1998 calendar year.
Value stocks are those securities that fall out of favor, sometimes because
their industry is at the wrong end of its cycle or the company is undergoing
what we hope are temporary problems. Some companies fall under the Wall Street
radar screen and receive no coverage because they are too small or too illiquid
for the major research organizations. However, if these companies have strong
balance sheets and their fundamentals are sound, such orphans are often our
favorites. In short, we follow self-made millionaire and legendary,
early-20th-century stock trader Bernard Baruch's investment advice and buy
"straw hats in the winter." Sooner or later we believe value will prevail and a
diversified portfolio of these unloved wallflowers, carefully selected, could
turn out to be the belles of the ball. We are convinced many of our value
holdings will return to favor; the unanswerable question is when.
Oil drillers and oil service companies were two examples of this wallflower
status in the portfolio at the end of the 12-month reporting period. These
stocks traded at very attractive valuations by historical standards,
understandably so because oil's $12 per-barrel price fell far short of $20, the
approximate 15-year average. Asian problems, the slowdown in the developed world
economies, and oversupply resulting from lack of discipline among OPEC and other
oil-exporting countries contributed to this oil price downturn. These conditions
produced compelling valuations for some companies. In our opinion, at a
price-to-earnings (P/E) ratio of 8 and book value of 1.25 times its price for
Tidewater Inc., and an 8.5 P/E ratio and a price-to-book ratio of 1.1 for Rowan
Cos. Inc., their stock prices struck us as too great a bargain to last. When the
price of a barrel of oil starts to move back toward its normal range, these ugly
ducklings could look like swans again.
48
<PAGE>
The two essentials for success in value investment are careful selection and
patience. The stock price turnaround does not come according to the investor's
schedule, but when it does come the results are gratifying. We plan to stay the
course with our value philosophy and urge our shareholders to do likewise.
This graph compares the performance of the Value Securities Fund as tracked by
the growth in value of a $10,000 investment, to that of Wilshire Small Company
Value Index from 5/1/98-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Value Securities Fund
$10,000 Investment (5/1/98 - 12/31/98)
<TABLE>
<CAPTION>
Value Securities Wilshire Small
Value Index
<S> <C> <C> <C> <C>
5/1/98 $10,000 $10,000
5/31/98 $9,760 -2.70% $9,730
6/30/98 $9,140 -1.71% $9,564
7/31/98 $8,240 -7.28% $8,867
8/31/98 $6,970 -11.93% $7,810
9/30/98 $7,240 2.97% $8,041
10/31/98 $7,670 3.63% $8,333
11/30/98 $7,690 2.87% $8,573
12/31/98 $7,790 1.30% 2.95% $8,825
</TABLE>
PORTFOLIOS SEEKING CURRENT INCOME
HIGH INCOME FUND
The past year proved to be challenging for the high yield market. In third
quarter 1998, global markets experienced severe disruption attributed to the
expanding global economic crisis. Much of this occurred after Russia declared a
moratorium on foreign debt payments and effectively devalued the ruble. Amid
concern over economic problems in Russia, as well as in Asia, credit spreads
widened dramatically, including within the high yield market. Fortunately, the
fourth quarter of 1998 saw a return of strength and stability to the market, a
signal that we believe may portend favorably for 1999.
During 1998, we made sector allocation adjustments with the primary emphasis on
increasing exposure to those industries that we think should pose limited
downside risk during an economic deceleration. In particular, we increased the
telecommunications sector weighting, favoring those companies with their own
networks, strong management teams and superior access to capital markets. We
maintained a healthy exposure to competitive local exchange carriers (CLECs),
where we focused on providers of diversified services, which generally have the
ability to cross-sell
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (60)
This chart shows the aggregate total return for the Value Securities Fund as of
12/31/98.
Aggregate Total Return*
Since Inception (5/1/98) -22.10%
*Since the portfolio existed for less than one year, the figure represents
aggregate total return from inception; therefore, average annual total return is
not provided.
49
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
GRAPHIC MATERIAL (61)
This chart shows the industry breakdown based on the percentage of total net
assets on 12/31/98 for the High Income Fund.
INDUSTRY BREAKDOWN
High Income Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------
<S> <C>
Consumer Services 25.6%
Telecommunications 20.8%
Process Industries 7.7%
Consumer Non-Durables 5.2%
Health Services 4.9%
Producer Manufacturing 4.5%
Transportation 4.1%
Energy Minerals 3.9%
Commercial Services 3.6%
Industrial Services 3.0%
Electronic Technology 2.6%
Consumer Durables 2.6%
Utilities 2.5%
Non-Energy Minerals 2.0%
Retail Trade 1.1%
Technology Services 1.1%
Cash and Equivalents 4.8%
</TABLE>
higher-margin products and reduce turnover rates. Noteworthy CLEC holdings
include Nextlink Communications Inc. and Intermedia Communications Inc. We also
initiated a holding in Level 3 Communications Inc., as it is building a
state-of-the-art global network.
Telecommunications made up 20.8% of the portfolio's total net assets on December
31, 1998. The industry benefited from customer demand and increased market
penetration, which is causing industry revenues to grow despite pricing
pressures. Our investments in mobile telephony providers represent our focus on
companies which we believe to have strong growth prospects and a defensible
market position. We maintained large positions in Nextel Communications Inc.;
Sprint Spectrum LP, which became majority owned by Sprint Corp. during the year;
and Sygnet Wireless Inc., which was purchased by Dobson Communications Co., and
subsequently offered to buy the bonds at a healthy premium. Within paging, we
initiated a position in Metrocall Inc., a strong consolidator in the industry,
while taking profits in Paging Network Inc.
We reduced our weighting to the industrial services sector, to 3% of total net
assets at the end of the period, from 8.2% on December 31, 1997. We focused on
non-cyclical companies such as Allied Waste North America Inc., whose bonds were
redeemed through a tender offer during the year, providing an attractive gain to
the portfolio. We also maintained solid allocations to the cable, media and
broadcasting sectors. We think cable is defensive in nature, and we preferred
industry leaders such as Cablevision Systems Corp. (CSC Holdings), domestically,
and Telewest Communications Plc. in the U.K. Similarly, we prefer industry
leaders in the broadcasting and media sectors, such as positions in Chancellor
Media Corp., a radio broadcaster, and Outdoor Systems Inc., the largest outdoor
advertiser in the U.S.
Looking forward, we believe attractive opportunities remain in high yield
corporate bonds over the short-to-intermediate term. Recent economic data
suggests benign inflation, and the Federal Reserve Board has gradually shifted
from a tightening to an easing bias. In addition, corporate profits continued to
exhibit resiliency. Although the recent turmoil in global financial markets may
affect the high yield market in the short term, we believe that recent
volatility should not significantly affect high yield
50
<PAGE>
bond fundamentals over the long term. Consequently, we remain optimistic
regarding the high yield market generally and High Income Fund specifically.
GRAPHIC MATERIAL (62)
This graph compares the performance of the High Income Fund as tracked by the
growth in value of a $10,000 investment, to that of the CS First Boston High
Yield Index and the Consumer Price Index from 1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
High Income Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
High Income CS First Boston Consumer
High Yield Price Index
<S> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000
1/31/89 $10,020 0.45% $ 10,045 0.11% $ 10,011
2/28/89 $10,080 0.46% $ 10,092 0.41% $ 10,052
3/31/89 $10,150 -0.72% $ 10,019 0.58% $ 10,111
4/30/89 $10,220 -0.24% $ 9,995 0.65% $ 10,176
5/31/89 $10,290 2.38% $ 10,233 0.57% $ 10,234
6/30/89 $10,300 1.44% $ 10,380 0.24% $ 10,259
7/31/89 $10,330 0.22% $ 10,403 0.24% $ 10,284
8/31/89 $10,370 -0.01% $ 10,402 0.16% $ 10,300
9/30/89 $10,300 -2.27% $ 10,166 0.32% $ 10,333
10/31/89 $10,070 -2.50% $ 9,912 0.48% $ 10,383
11/30/89 $10,050 0.20% $ 9,931 0.24% $ 10,407
12/31/89 $10,130 -0.45% $ 9,887 0.16% $ 10,424
1/31/90 $9,920 -3.52% $ 9,539 1.03% $ 10,531
2/28/90 $9,770 -1.85% $ 9,362 0.47% $ 10,581
3/31/90 $9,924 2.88% $ 9,632 0.55% $ 10,639
4/30/90 $9,831 0.42% $ 9,672 0.16% $ 10,656
5/31/90 $9,893 2.08% $ 9,874 0.23% $ 10,681
6/30/90 $10,152 3.15% $ 10,185 0.54% $ 10,738
7/31/90 $10,379 3.23% $ 10,514 0.38% $ 10,779
8/31/90 $9,893 -4.62% $ 10,028 0.92% $ 10,878
9/30/90 $9,251 -7.63% $ 9,263 0.84% $ 10,970
10/31/90 $8,879 -2.51% $ 9,030 0.60% $ 11,036
11/30/90 $9,076 2.01% $ 9,212 0.22% $ 11,060
12/31/90 $9,251 0.48% $ 9,256 0.00% $ 11,060
1/31/91 $9,345 2.74% $ 9,510 0.60% $ 11,126
2/28/91 $9,934 8.63% $ 10,330 0.15% $ 11,143
3/31/91 $10,286 6.20% $ 10,971 0.15% $ 11,160
4/30/91 $10,566 4.15% $ 11,426 0.15% $ 11,176
5/31/91 $10,659 0.50% $ 11,483 0.30% $ 11,210
6/30/91 $10,907 2.62% $ 11,784 0.29% $ 11,242
7/31/91 $11,168 3.38% $ 12,182 0.15% $ 11,259
8/31/91 $11,372 1.82% $ 12,404 0.29% $ 11,292
9/30/91 $11,519 2.27% $ 12,686 0.44% $ 11,342
10/31/91 $11,803 3.31% $ 13,105 0.15% $ 11,359
11/30/91 $11,939 0.80% $ 13,210 0.29% $ 11,392
12/31/91 $12,007 0.73% $ 13,307 0.07% $ 11,400
1/31/92 $12,392 4.07% $ 13,848 0.15% $ 11,417
2/29/92 $12,608 2.43% $ 14,185 0.36% $ 11,458
3/31/92 $12,778 1.49% $ 14,396 0.51% $ 11,516
4/30/92 $12,857 0.08% $ 14,408 0.14% $ 11,532
5/31/92 $13,038 1.36% $ 14,604 0.14% $ 11,548
6/30/92 $13,161 0.99% $ 14,748 0.36% $ 11,590
7/31/92 $13,411 1.54% $ 14,975 0.21% $ 11,614
8/31/92 $13,637 1.38% $ 15,182 0.28% $ 11,647
9/30/92 $13,744 0.65% $ 15,281 0.28% $ 11,679
10/31/92 $13,577 -1.04% $ 15,122 0.35% $ 11,720
11/30/92 $13,839 1.50% $ 15,349 0.14% $ 11,737
12/31/92 $13,993 1.13% $ 15,522 -0.07% $ 11,729
1/31/93 $14,255 2.73% $ 15,946 0.49% $ 11,786
2/28/93 $14,481 1.98% $ 16,261 0.35% $ 11,827
3/31/93 $14,695 2.11% $ 16,605 0.35% $ 11,869
4/30/93 $14,754 0.57% $ 16,699 0.28% $ 11,902
5/31/93 $14,897 1.46% $ 16,943 0.14% $ 11,919
6/30/93 $15,206 1.81% $ 17,250 0.14% $ 11,935
7/31/93 $15,317 1.04% $ 17,429 0.00% $ 11,935
8/31/93 $15,403 0.85% $ 17,577 0.28% $ 11,969
9/30/93 $15,403 0.57% $ 17,677 0.21% $ 11,994
10/31/93 $15,921 1.83% $ 18,001 0.41% $ 12,043
11/30/93 $16,020 1.26% $ 18,228 0.07% $ 12,051
12/31/93 $16,192 1.26% $ 18,457 0.00% $ 12,051
1/31/94 $16,537 1.78% $ 18,786 0.27% $ 12,084
2/28/94 $16,414 0.15% $ 18,814 0.34% $ 12,125
3/31/94 $15,637 -2.94% $ 18,261 0.34% $ 12,166
4/30/94 $15,415 -1.34% $ 18,016 0.14% $ 12,183
5/31/94 $15,465 0.57% $ 18,119 0.07% $ 12,192
6/30/94 $15,587 -0.67% $ 17,998 0.34% $ 12,233
7/31/94 $15,561 0.47% $ 18,082 0.27% $ 12,266
8/31/94 $15,678 0.72% $ 18,212 0.40% $ 12,315
9/30/94 $15,730 0.40% $ 18,285 0.27% $ 12,349
10/31/94 $15,762 0.07% $ 18,298 0.07% $ 12,357
11/30/94 $15,658 -1.16% $ 18,086 0.13% $ 12,373
12/31/94 $15,827 1.06% $ 18,278 0.00% $ 12,373
1/31/95 $16,086 1.05% $ 18,469 0.40% $ 12,423
2/28/95 $16,708 2.46% $ 18,924 0.40% $ 12,472
3/31/95 $16,877 1.13% $ 19,138 0.33% $ 12,514
4/30/95 $17,369 2.22% $ 19,562 0.33% $ 12,555
5/31/95 $17,849 2.82% $ 20,114 0.20% $ 12,580
6/30/95 $17,942 0.66% $ 20,247 0.20% $ 12,605
7/31/95 $18,191 1.55% $ 20,561 0.00% $ 12,605
8/31/95 $18,247 0.28% $ 20,618 0.26% $ 12,638
9/30/95 $18,441 1.15% $ 20,855 0.20% $ 12,663
10/31/95 $18,691 1.11% $ 21,087 0.33% $ 12,705
11/30/95 $18,636 0.47% $ 21,186 -0.07% $ 12,696
12/31/95 $18,955 1.27% $ 21,455 -0.07% $ 12,687
1/31/96 $19,315 1.90% $ 21,863 0.59% $ 12,762
2/29/96 $19,510 0.53% $ 21,979 0.32% $ 12,803
3/31/96 $19,371 -0.27% $ 21,919 0.52% $ 12,870
4/30/96 $19,468 0.54% $ 22,038 0.39% $ 12,920
5/31/96 $19,621 0.81% $ 22,216 0.19% $ 12,944
6/30/96 $19,669 0.22% $ 22,265 0.06% $ 12,952
7/31/96 $19,867 0.90% $ 22,465 0.19% $ 12,977
8/31/96 $20,218 1.09% $ 22,710 0.19% $ 13,001
9/30/96 $20,705 1.72% $ 23,101 0.32% $ 13,043
10/31/96 $20,904 0.84% $ 23,295 0.32% $ 13,085
11/30/96 $21,285 1.56% $ 23,658 0.19% $ 13,110
12/31/96 $21,590 1.95% $ 24,120 0.00% $ 13,110
1/31/97 $21,727 0.73% $ 24,296 0.32% $ 13,151
2/28/97 $22,108 1.88% $ 24,752 0.31% $ 13,192
3/31/97 $21,559 -1.12% $ 24,475 0.25% $ 13,225
4/30/97 $21,819 0.89% $ 24,693 0.12% $ 13,241
5/31/97 $22,322 2.01% $ 25,189 -0.06% $ 13,233
6/30/97 $22,634 1.36% $ 25,532 0.12% $ 13,249
7/31/97 $23,233 2.12% $ 26,073 0.12% $ 13,265
8/31/97 $23,283 0.54% $ 26,214 0.19% $ 13,290
9/30/97 $23,750 1.98% $ 26,733 0.25% $ 13,323
10/31/97 $23,567 -0.01% $ 26,730 0.25% $ 13,357
11/30/97 $23,850 0.71% $ 26,920 -0.06% $ 13,349
12/31/97 $24,066 0.91% $ 27,165 -0.12% $ 13,333
1/31/98 $24,399 1.70% $ 27,627 0.19% $ 13,358
2/28/98 $24,549 0.78% $ 27,842 0.19% $ 13,383
3/31/98 $24,832 0.50% $ 27,982 0.19% $ 13,409
4/30/98 $24,982 0.75% $ 28,192 0.18% $ 13,433
5/31/98 $24,966 0.30% $ 28,276 0.18% $ 13,457
6/30/98 $25,018 0.21% $ 28,336 0.12% $ 13,473
7/31/98 $25,183 0.70% $ 28,534 0.12% $ 13,489
8/31/98 $23,481 -6.79% $ 26,596 0.12% $ 13,506
9/30/98 $23,462 -0.01% $ 26,594 0.12% $ 13,522
10/31/98 $22,877 -1.99% $ 26,065 0.24% $ 13,554
11/30/98 $24,359 5.07% $ 27,386 0.00% $ 13,554
12/31/98 $24,304 -0.23% -0.23% $ 27,323 -0.06% $ 13,546
</TABLE>
TEMPLETON GLOBAL INCOME SECURITIES FUND
During the year under review, raw material and commodity prices steadily
declined, generally benefiting developed markets while hurting emerging
countries. The price declines contributed to a very positive global inflation
environment, allowing bond yields in the world's major industrial markets to
fall to historically low levels. At the same time, the situation also helped
create a great degree of distress in many emerging markets, as commodities play
a key role in many of these countries' economies. As a result, the period
witnessed intermittent yet continuing crises develop in emerging countries
around the world.
These divergent market trends meant that portfolio managers had to be selective
about their investment allocations. In general, global bond investors reacted to
these conditions by progressively reducing their exposure to emerging markets
debt securities, preferring to increase their holdings of high-quality,
industrial market government bonds.
Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth. U.S. economic expansion
continued for the sixth consecutive year, while unemployment fell to levels not
seen since the early
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (63)
This chart shows the average annual total return for the High Income Fund as of
12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year +0.99%
5-Year +8.46%
Since Inception (1/24/89) +9.35%
</TABLE>
GRAPHIC MATERIAL (64)
This chart shows in pie format the geographic distribution of Templeton Global
Income Securities Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton Global Income Securities Fund
Based on Total Net Assets
12/31/98
<TABLE>
<CAPTION>
<S> <C>
North America 42.9%
Europe 35.6%
Latin America 8.7%
Australia/New Zealand 8.1%
Asia 0.3%
Short-term Investments
& Other Net Assets 4.4%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
51
<PAGE>
1970s. European economies also emerged from a sluggish growth environment to
post impressive economic gains. Against this background, most European central
banks reduced official interest rates through December, bringing the beginning
short-term rates for the new European Central Bank (ECB) to 3.0% in 1999. The
ECB expects rates to stay at these levels for quite some time, but if growth
continues to falter into 1999, we think the ECB may have to act again to stop
the region from falling into a recession.
Consumer price inflation in the U.S. and Europe was rather tame during the
period, surprising many economists because economic growth at the recent pace
often generates at least modest price pressures. The relatively soft price
environment was much of the reason for global interest-rate declines.
Japan was an exception to this healthy global environment. Government
policy-makers seemed unable to craft a solution to Japan's banking and economic
woes. In our view, the country's ongoing troubles contributed greatly to the
emerging markets crisis during the 12-month reporting period. The yen's
persistent weakness and country's poor domestic demand for exports from other
Asian markets put enormous pressure on developing Asian economies.
In the summer, the crisis seemed to spread out of Asia and affect some other
emerging markets. In particular, Russia, with its precarious debt-financing
needs, came under tremendous pressure. Russia declared a moratorium on debt
service and ultimately devalued its currency, the ruble, seeking some stability.
In the wake of these events, the debt instruments of other developing markets,
especially those in Latin and Central America, fell in value.
Templeton Global Income Securities Fund attempted to maximize its return during
the reporting period by allocating approximately 91% of its assets to
intermediate- and long-term bonds in the industrial markets and about 9% of its
assets to the highest-quality and most-widely traded bonds in the emerging
markets. We believed this combination of bonds offered the greatest opportunity
for higher, long-term returns at the cost of only modestly higher, short-term
volatility.
Overall, the portfolio's allocation to emerging markets exerted a drag on
performance. Emerging market bonds underperformed higher-quality industrial
market bonds during the period and this, in turn, caused the fund to
underperform its benchmark,
52
<PAGE>
the J.P. Morgan Global Government Bond Index. However, the portfolio management
team believes that the fund's emerging-markets positions should offer more
favorable returns over the next three to five years, but may be volatile in the
meantime.
The portfolio's country allocations changed moderately during the year under
review. The allocation to North America increased by 6.2%, while the European
region remained stable at 35.6% of total net assets. Within Europe, however, we
increased our exposure to Denmark (2.7%), Germany (11.8%), Belgium (4.8%) and
the U.K. (8.5%) and decreased our positions in Italy (5.1%) and Sweden (2.7%) at
the end of the period. We began the period with 21% invested in the emerging
markets, primarily in Latin America, and ended the period with less than 10%
exposure. These allocation changes reflected our views of slower growth in 1999
and continued uncertainty in the emerging markets going into next year.
The largest change in the fund's allocation involved the amount of foreign
currency hedging in regard to the portfolio's European holdings. We typically
undertook currency hedging activities to minimize the loss of value of the
portfolio's non-U.S. dollar-denominated bonds when the U.S. dollar's value rose
in relation to European currencies. At the end of the reporting period, the
portfolio's net U.S. dollar exposure, the value of the portfolio's securities
plus the effect of foreign currency hedging, stood at 50.5%, down from 73.7% at
the end of the previous fiscal year. The decrease in foreign currency hedging
was primarily the result of the management team's expectation that the U.S.
dollar will continue to depreciate through the first half of 1999.
Outside of the continued uncertainty in the emerging markets, we believe the
critical issue for global interest rates will remain concern about the balance
between global growth and inflation. The trend in global economic growth for
1999 is clearly toward a weaker performance than in the last few years. The
extent of the weakness may largely depend on developments in the U.S., where
growth in 1998 is likely to be approximately 3.5% and according to many
economists is expected to be around 2% next year. In turn, the U.S. economy is
dependent to a large degree on stability in Latin America. Problems there could
further depress U.S. exports and growth in general, possibly resulting in a
negative effect on European economic performance.
We believe that global inflation will likely be quite tame in the period ahead
and that global economic growth may decline modestly, but not far enough to go
into
53
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE J.P. MORGAN AND STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (66)
This chart shows the average annual total return for the Templeton Global
Income Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +7.08%
5-Year +5.56%
Since Inception (1/24/89) +7.52%
</TABLE>
INVESTMENT HOLDINGS
U.S. Government Securities Fund
Based on Total Net Assets
12/31/98
GRAPHIC MATERIAL (67)
This chart shows in pie format the investment holdings of the U.S. Government
Securities Fund based on total net assets as of 12/31/98.
<TABLE>
<CAPTION>
<S> <C>
Mortgage-Backed Securities 75.8%
Agency Notes and Bonds 23.1%
Cash & Equivalents 1.1%
</TABLE>
recession. If this happens, it would be a very promising environment for
high-quality bonds and would make us positive for the intermediate-term outlook
for the portfolio.
GRAPHIC MATERIAL (65)
This graph compares the performance of the Templeton Global Income Securities
Fund as tracked by the growth in value of a $10,000 investment, to that of the
JP Morgan Global Government Bond Index and the Consumer Price Index from
1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are J.P. Morgan and Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Templeton Global Income Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Templeton Global Income JP Morgan Global Consumer Price Index
Securities Fund Government Bond Index
<S> <C> <C> <C>
1/24/89 $10,000 $10,000 $10,000
1/31/89 $10,020 $9,977 $10,012
2/28/89 $10,080 $9,961 $10,052
3/31/89 $10,150 $9,877 $10,110
4/30/89 $10,220 $10,039 $10,176
5/31/89 $10,290 $9,931 $10,234
6/30/89 $10,330 $10,157 $10,259
7/31/89 $10,510 $10,561 $10,285
8/31/89 $10,610 $10,249 $10,301
9/30/89 $10,600 $10,411 $10,333
10/31/89 $10,570 $10,545 $10,384
11/30/89 $10,760 $10,639 $10,408
12/31/89 $10,930 $10,763 $10,424
1/31/90 $10,920 $10,602 $10,531
2/28/90 $10,850 $10,488 $10,581
3/31/90 $10,965 $10,423 $10,639
4/30/90 $10,944 $10,382 $10,656
5/31/90 $11,138 $10,714 $10,681
6/30/90 $11,454 $10,908 $10,738
7/31/90 $11,729 $11,229 $10,779
8/31/90 $11,627 $11,141 $10,878
9/30/90 $11,617 $11,245 $10,969
10/31/90 $11,688 $11,690 $11,035
11/30/90 $11,882 $11,896 $11,060
12/31/90 $12,004 $12,028 $11,060
1/31/91 $12,147 $12,301 $11,126
2/28/91 $12,412 $12,313 $11,143
3/31/91 $12,147 $11,928 $11,159
4/30/91 $12,320 $12,072 $11,175
5/31/91 $12,463 $12,082 $11,208
6/30/91 $12,359 $11,921 $11,242
7/31/91 $12,605 $12,173 $11,258
8/31/91 $12,648 $12,426 $11,291
9/30/91 $12,982 $12,879 $11,341
10/31/91 $13,154 $13,006 $11,357
11/30/91 $13,132 $13,218 $11,390
12/31/91 $13,486 $13,886 $11,399
1/31/92 $13,454 $13,614 $11,415
2/29/92 $13,464 $13,575 $11,457
3/31/92 $13,475 $13,449 $11,515
4/30/92 $13,604 $13,561 $11,531
5/31/92 $13,871 $13,946 $11,547
6/30/92 $13,868 $14,327 $11,589
7/31/92 $14,014 $14,642 $11,614
8/31/92 $13,846 $15,032 $11,646
9/30/92 $13,197 $15,017 $11,679
10/31/92 $13,477 $14,642 $11,721
11/30/92 $13,253 $14,383 $11,737
12/31/92 $13,432 $14,519 $11,729
1/31/93 $13,533 $14,765 $11,787
2/28/93 $13,734 $15,003 $11,828
3/31/93 $14,148 $15,233 $11,870
4/30/93 $14,574 $15,511 $11,903
5/31/93 $14,809 $15,609 $11,919
6/30/93 $14,778 $15,622 $11,936
7/31/93 $14,825 $15,628 $11,935
8/31/93 $15,155 $16,091 $11,969
9/30/93 $15,107 $16,261 $11,993
10/31/93 $15,461 $16,253 $12,044
11/30/93 $15,155 $16,134 $12,052
12/31/93 $15,673 $16,299 $12,051
1/31/94 $15,967 $16,453 $12,085
2/28/94 $15,602 $16,272 $12,127
3/31/94 $15,131 $16,198 $12,168
4/30/94 $15,119 $16,185 $12,185
5/31/94 $15,178 $16,051 $12,192
6/30/94 $14,572 $16,242 $12,233
7/31/94 $14,804 $16,395 $12,266
8/31/94 $14,926 $16,353 $12,317
9/30/94 $14,914 $16,433 $12,349
10/31/94 $15,001 $16,679 $12,358
11/30/94 $15,001 $16,469 $12,374
12/31/94 $14,891 $16,508 $12,374
1/31/95 $14,793 $16,841 $12,423
2/28/95 $15,026 $17,276 $12,473
3/31/95 $15,294 $18,155 $12,514
4/30/95 $15,636 $18,444 $12,555
5/31/95 $16,015 $18,958 $12,580
6/30/95 $16,087 $19,077 $12,605
7/31/95 $16,189 $19,167 $12,605
8/31/95 $15,986 $18,635 $12,639
9/30/95 $16,341 $19,054 $12,662
10/31/95 $16,607 $19,241 $12,704
11/30/95 $16,747 $19,455 $12,695
12/31/95 $17,077 $19,696 $12,687
1/31/96 $17,000 $19,494 $12,761
2/29/96 $16,797 $19,380 $12,803
3/31/96 $16,848 $19,350 $12,869
4/30/96 $16,975 $19,279 $12,918
5/31/96 $17,064 $19,298 $12,943
6/30/96 $17,293 $19,467 $12,951
7/31/96 $17,362 $19,825 $12,976
8/31/96 $17,582 $19,908 $13,001
9/30/96 $17,857 $20,017 $13,042
10/31/96 $18,214 $20,415 $13,083
11/30/96 $18,654 $20,706 $13,108
12/31/96 $18,723 $20,562 $13,108
1/31/97 $18,489 $20,048 $13,149
2/28/97 $18,407 $19,909 $13,189
3/31/97 $18,338 $19,758 $13,222
4/30/97 $18,434 $19,647 $13,237
5/31/97 $18,586 $20,110 $13,229
6/30/97 $18,787 $20,339 $13,245
7/31/97 $18,920 $20,264 $13,261
8/31/97 $18,861 $20,239 $13,286
9/30/97 $19,216 $20,688 $13,320
10/31/97 $18,979 $21,127 $13,353
11/30/97 $19,053 $20,873 $13,345
12/31/97 $19,186 $20,850 $13,329
1/31/98 $19,408 $21,060 $13,353
2/28/98 $19,601 $21,216 $13,380
3/31/98 $19,689 $21,057 $13,406
4/30/98 $19,734 $21,380 $13,431
5/31/98 $19,704 $21,472 $13,455
6/30/98 $19,699 $21,532 $13,471
7/31/98 $19,747 $21,591 $13,487
8/31/98 $18,901 $22,187 $13,503
9/30/98 $19,907 $23,346 $13,519
10/31/98 $20,322 $23,869 $13,552
11/30/98 $20,497 $23,599 $13,552
12/31/98 $20,545 $24,043 $13,546
Total Return 105.45% 140.43% 35.46%
</TABLE>
U.S. GOVERNMENT SECURITIES FUND
During the 12-month reporting period, low inflation and strong growth, driven
primarily by robust consumer demand, characterized the U.S. economy.
Internationally, disruptions in overseas markets occurred throughout the year,
as the Asian financial crisis, which began during the summer of 1997,
strengthened its grip on many economies. The combination of low inflation in the
U.S. and the troubles in foreign financial markets evidently made U.S. Treasury
securities a safe haven for many investors, helping to push yields lower during
most of the reporting period. The 30-year Treasury bond yield declined 84 basis
points, from 5.93% on December 31, 1997, to 5.09% one year later, but dropped as
low as 4.72% in the beginning of October.
In August, the Asian crisis appeared to have spread beyond the Pacific Rim and
to have taken hold in Russia, which devalued the ruble and defaulted on its
foreign debt payments. This event further shook financial markets worldwide,
causing many investors to shun virtually all types of securities except for the
most widely traded U.S. Treasury issues. Amid this flight-to-quality mentality,
the yields on many U.S. Treasuries fell far more than the yields on other
products, such as mortgage pass-through securities (pass-throughs), offering
opportunities to purchase mortgage-backed securities at what we felt were very
attractive levels.
Beginning with the Russian debt crisis, and culminating with the well-publicized
bailout of a major hedge fund, the availability of capital in the U.S. economy
declined. This string of events appeared to reduce Wall Street's desire to
commit capital to the fixed-income markets, especially in secondary market
activity, where profit margins tend to be lower. We believe this pullback
increased volatility in the fixed-income
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
54
<PAGE>
markets, and created more restrictive lending conditions in the U.S. These
problems were magnified, as the global slowdown worked its way into the U.S.
economy. Manufacturing sector weakness, which worsened throughout the year,
finally trickled into the service sector in the third quarter, notably impacting
financial firms. Concerned about the combination of these factors leading to
slower economic growth, the Federal Reserve Board (the Fed) lowered the federal
funds target rate three times, totaling 0.75% from September through November,
to 4.75%. The Fed's willingness to step in and provide liquidity evidently
boosted investor confidence, and caused spreads between mortgage pass-throughs
and Treasuries to narrow somewhat.
Mortgage pass-throughs underperformed comparable U.S. Treasury securities during
the reporting period, due to the extent of the flight-to-quality mentality, in
our opinion. Still, lower-coupon mortgage pass-throughs benefited from price
appreciation during the year. The portfolio increased its exposure to
lower-coupon Federal National Mortgage Association (FNMA or Fannie Mae), Federal
Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and Government National
Mortgage Association (GNMA or Ginnie Mae) pass-throughs, and reduced its
exposure to higher-coupon pass-throughs during the 12 months under review. In
general, lower-coupon mortgage pass-throughs have less prepayment risk in a
declining interest-rate environment than higher-coupon pass-throughs. Therefore,
we believe that the fund is well-positioned to weather any increase in
prepayments that may come as a result of the very low mortgage rates seen during
1998's third and fourth quarters.
Going forward, we anticipate that interest rates, in general, may move slightly
lower as the world's central banks shift their focus from battling inflation to
guarding against deflation. However, in spite of this deflationary environment,
we will also remain vigilant regarding any increase in interest rates. U.S.
Government Securities Fund will maintain its fiscally responsible strategy of
investing to provide a steady level of income for the fund's shareholders. In an
effort to achieve this goal, we will continue to invest predominately in U.S.
government mortgage-backed and agency securities.
GRAPHIC MATERIAL (68)
This graph compares the performance of the U.S. Government Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the Lehman
Brothers Intermediate Government Bond Index and the Consumer Price Index from
3/14/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
U.S. Government Securities Fund
$10,000 Investment (3/14/89 - 12/31/98)
<TABLE>
<CAPTION>
U.S. Gov't Securities Lehman Brothers Consumer
Fund Intermediate Government Price Index
Bond Index
<S> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000
3/31/89 $10,000 0.26% $ 10,026 0.32% $ 10,032
4/30/89 $10,000 2.02% $ 10,228 0.65% $ 10,097
5/31/89 $10,000 1.93% $ 10,426 0.57% $ 10,155
6/30/89 $10,050 2.55% $ 10,692 0.24% $ 10,179
7/31/89 $10,190 2.03% $ 10,909 0.24% $ 10,203
8/31/89 $10,080 -1.35% $ 10,761 0.16% $ 10,220
9/30/89 $10,140 0.48% $ 10,813 0.32% $ 10,252
10/31/89 $10,370 2.10% $ 11,040 0.48% $ 10,302
11/30/89 $10,470 0.99% $ 11,149 0.24% $ 10,326
12/31/89 $10,540 0.29% $ 11,182 0.16% $ 10,343
1/31/90 $10,420 -0.62% $ 11,112 1.03% $ 10,449
2/28/90 $10,480 0.37% $ 11,153 0.47% $ 10,498
3/31/90 $10,510 0.12% $ 11,167 0.55% $ 10,556
4/30/90 $10,398 -0.33% $ 11,130 0.16% $ 10,573
5/31/90 $10,671 2.14% $ 11,368 0.23% $ 10,597
6/30/90 $10,793 1.32% $ 11,518 0.54% $ 10,655
7/31/90 $10,964 1.40% $ 11,680 0.38% $ 10,695
8/31/90 $10,894 -0.36% $ 11,637 0.92% $ 10,794
9/30/90 $10,974 0.89% $ 11,741 0.84% $ 10,884
10/31/90 $11,096 1.39% $ 11,904 0.60% $ 10,950
11/30/90 $11,318 1.51% $ 12,084 0.22% $ 10,974
12/31/90 $11,480 1.38% $ 12,251 0.00% $ 10,974
1/31/91 $11,652 1.03% $ 12,377 0.60% $ 11,039
2/28/91 $11,753 0.61% $ 12,452 0.15% $ 11,056
3/31/91 $11,813 0.55% $ 12,521 0.15% $ 11,073
4/30/91 $11,904 1.03% $ 12,650 0.15% $ 11,089
5/31/91 $11,995 0.56% $ 12,721 0.30% $ 11,122
6/30/91 $12,011 0.08% $ 12,731 0.29% $ 11,155
7/31/91 $12,178 1.08% $ 12,868 0.15% $ 11,171
8/31/91 $12,398 1.90% $ 13,113 0.29% $ 11,204
9/30/91 $12,649 1.70% $ 13,336 0.44% $ 11,253
10/31/91 $12,806 1.14% $ 13,488 0.15% $ 11,270
11/30/91 $12,890 1.17% $ 13,646 0.29% $ 11,303
12/31/91 $13,235 2.43% $ 13,977 0.07% $ 11,311
1/31/92 $13,046 -0.96% $ 13,843 0.15% $ 11,328
2/29/92 $13,162 0.31% $ 13,886 0.36% $ 11,368
3/31/92 $13,067 -0.40% $ 13,830 0.51% $ 11,426
4/30/92 $13,172 0.90% $ 13,955 0.14% $ 11,442
5/31/92 $13,465 1.49% $ 14,163 0.14% $ 11,458
6/30/92 $13,672 1.44% $ 14,367 0.36% $ 11,500
7/31/92 $13,953 1.92% $ 14,643 0.21% $ 11,524
8/31/92 $14,116 1.02% $ 14,792 0.28% $ 11,556
9/30/92 $14,278 1.38% $ 14,996 0.28% $ 11,588
10/31/92 $14,040 -1.20% $ 14,816 0.35% $ 11,629
11/30/92 $14,072 -0.41% $ 14,755 0.14% $ 11,645
12/31/92 $14,332 1.29% $ 14,946 -0.07% $ 11,637
1/31/93 $14,635 1.86% $ 15,224 0.49% $ 11,694
2/28/93 $14,895 1.47% $ 15,448 0.35% $ 11,735
3/31/93 $14,971 0.37% $ 15,505 0.35% $ 11,776
4/30/93 $15,057 0.78% $ 15,626 0.28% $ 11,809
5/31/93 $15,101 -0.27% $ 15,583 0.14% $ 11,826
6/30/93 $15,374 1.45% $ 15,809 0.14% $ 11,842
7/31/93 $15,476 0.20% $ 15,841 0.00% $ 11,842
8/31/93 $15,702 1.49% $ 16,077 0.28% $ 11,875
9/30/93 $15,702 0.41% $ 16,143 0.21% $ 11,900
10/31/93 $15,781 0.24% $ 16,182 0.41% $ 11,949
11/30/93 $15,577 -0.49% $ 16,102 0.07% $ 11,957
12/31/93 $15,724 0.41% $ 16,168 0.00% $ 11,957
1/31/94 $15,928 0.99% $ 16,328 0.27% $ 11,990
2/28/94 $15,611 -1.37% $ 16,105 0.34% $ 12,030
3/31/94 $15,058 -1.46% $ 15,870 0.34% $ 12,071
4/30/94 $14,911 -0.65% $ 15,767 0.14% $ 12,088
5/31/94 $14,934 0.07% $ 15,778 0.07% $ 12,097
6/30/94 $14,839 0.02% $ 15,781 0.34% $ 12,138
7/31/94 $15,209 1.31% $ 15,987 0.27% $ 12,171
8/31/94 $15,197 0.29% $ 16,034 0.40% $ 12,219
9/30/94 $14,887 -0.83% $ 15,901 0.27% $ 12,252
10/31/94 $14,818 0.02% $ 15,904 0.07% $ 12,261
11/30/94 $14,818 -0.44% $ 15,834 0.13% $ 12,277
12/31/94 $15,009 0.33% $ 15,886 0.00% $ 12,277
1/31/95 $15,343 1.63% $ 16,145 0.40% $ 12,326
2/28/95 $15,761 1.93% $ 16,457 0.40% $ 12,375
3/31/95 $15,845 0.55% $ 16,547 0.33% $ 12,416
4/30/95 $16,084 1.16% $ 16,739 0.33% $ 12,457
5/31/95 $16,788 2.82% $ 17,211 0.20% $ 12,482
6/30/95 $16,879 0.64% $ 17,321 0.20% $ 12,507
7/31/95 $16,828 0.05% $ 17,330 0.00% $ 12,507
8/31/95 $17,046 0.82% $ 17,472 0.26% $ 12,539
9/30/95 $17,225 0.67% $ 17,589 0.20% $ 12,565
10/31/95 $17,455 1.10% $ 17,783 0.33% $ 12,606
11/30/95 $17,686 1.22% $ 18,000 -0.07% $ 12,597
12/31/95 $17,929 0.99% $ 18,178 -0.07% $ 12,588
1/31/96 $18,045 0.84% $ 18,331 0.59% $ 12,663
2/29/96 $17,737 -1.06% $ 18,136 0.32% $ 12,703
3/31/96 $17,609 -0.46% $ 18,053 0.52% $ 12,769
4/30/96 $17,494 -0.29% $ 18,000 0.39% $ 12,819
5/31/96 $17,417 -0.05% $ 17,991 0.19% $ 12,843
6/30/96 $17,667 1.02% $ 18,175 0.06% $ 12,851
7/31/96 $17,709 0.31% $ 18,231 0.19% $ 12,875
8/31/96 $17,681 0.11% $ 18,251 0.19% $ 12,900
9/30/96 $18,026 1.29% $ 18,487 0.32% $ 12,941
10/31/96 $18,412 1.64% $ 18,790 0.32% $ 12,983
11/30/96 $18,688 1.21% $ 19,017 0.19% $ 13,007
12/31/96 $18,577 -0.54% $ 18,915 0.00% $ 13,007
1/31/97 $18,660 0.38% $ 18,987 0.32% $ 13,049
2/28/97 $18,702 0.16% $ 19,017 0.31% $ 13,089
3/31/97 $18,605 -0.57% $ 18,908 0.25% $ 13,122
4/30/97 $18,881 1.13% $ 19,122 0.12% $ 13,138
5/31/97 $19,060 0.78% $ 19,271 -0.06% $ 13,130
6/30/97 $19,271 0.86% $ 19,437 0.12% $ 13,146
7/31/97 $19,694 1.84% $ 19,795 0.12% $ 13,161
8/31/97 $19,563 -0.38% $ 19,719 0.19% $ 13,186
9/30/97 $19,826 1.09% $ 19,934 0.25% $ 13,219
10/31/97 $20,059 1.17% $ 20,168 0.25% $ 13,253
11/30/97 $20,117 0.22% $ 20,212 -0.06% $ 13,245
12/31/97 $20,307 0.81% $ 20,376 -0.12% $ 13,229
1/31/98 $20,526 1.30% $ 20,641 0.19% $ 13,254
2/28/98 $20,555 -0.11% $ 20,618 0.19% $ 13,279
3/31/98 $20,628 0.31% $ 20,682 0.19% $ 13,304
4/30/98 $20,730 0.48% $ 20,781 0.18% $ 13,328
5/31/98 $20,905 0.69% $ 20,924 0.18% $ 13,352
6/30/98 $21,032 0.67% $ 21,065 0.12% $ 13,368
7/31/98 $21,095 0.38% $ 21,145 0.12% $ 13,384
8/31/98 $21,394 1.89% $ 21,544 0.12% $ 13,400
9/30/98 $21,786 2.33% $ 22,046 0.12% $ 13,416
10/31/98 $21,661 0.17% $ 22,084 0.24% $ 13,449
11/30/98 $21,739 -0.31% $ 22,015 0.00% $ 13,449
12/31/98 $21,818 0.36% 0.39% $ 22,101 -0.06% $ 13,440
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (69)
This chart shows the average annual total return for US Government Securities
Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------------
<S> <C>
1-Year +7.44%
5-Year +6.77%
Since Inception (3/14/89) +8.29%
</TABLE>
55
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
ZERO COUPON 2000 FUND
ZERO COUPON 2005 FUND
ZERO COUPON 2010 FUND
During the past year, the domestic economy had the best of all worlds: continued
growth in an environment of subdued inflation and falling interest rates. Higher
income levels coupled with a robust real estate market and increasing stock
prices helped fuel the consumer sector, which seemed to be the primary driver of
domestic growth. Consumption also appeared to buoy the labor market, with the
unemployment rate reaching 4.5% for 1998, the lowest in 28 years. The overall
economy, as measured by U.S. Gross Domestic Product, grew 3.9% in 1998, well
above the Federal Reserve Board's (the Fed's) targeted long-term growth rate of
2.50%.* Inflation as measured by the Consumer Price Index year-over-year is up
only 1.6%.
Tempering growth, overcapacity in manufacturing worldwide and U.S. export-sector
declines stood in stark contrast to consumer-sector gains. The emerging markets
crisis that prevailed for much of the reporting period hampered U.S.
manufacturers and produced record trade deficits. The export sector reportedly
was hard hit as increased competition from low-cost imports exacerbated rising
domestic wage costs and limited their pricing power. With many world currencies
in turmoil, an ensuing "flight to quality" fueled tremendous demand for U.S.
Treasuries, a traditional safe haven in times of market and political turmoil.
Citing a growing credit crisis as a threat to the recent economic expansion, the
Fed cut the federal funds target rate three times over seven weeks, for a total
of 75 basis points (0.75%), bringing it to 4.75% on November 17, 1998. This
revitalized the credit markets and spurred equity prices in the process.
Reflecting strong appeal for dollar-denominated bills, notes and bonds, yields
for short-, medium- and long-term Treasuries fell dramatically for the year. The
yield on 10-year Treasuries, a reasonable proxy for the Zero Coupon 2010 Fund,
declined from 5.67% on January 2, 1998, to 4.65% on December 31, 1998, falling
as low as 4.16% on October 5, 1998, before rebounding. The yield on the 5-year
Treasury note followed a similar pattern, falling from 5.63% on January 2, 1998,
to 4.56% on December 31, 1998.
*Source: Bureau of Labor Statistics.
56
<PAGE>
\The Zero Coupon portfolios invest primarily in securities issued by government
sponsored agencies. There is only the slightest amount of additional risk in
these securities relative to direct obligations of the U.S. government, in our
opinion. Due to the inverse relationship zero coupon bonds have with interest
rates, all three portfolios benefited from the declining interest rates during
the year. Because long-term interest rates fell the most and also because
longer-term portfolios are generally more interest-rate sensitive, Zero Coupon
2010 Fund fared best, gaining +14.5% on the year. Zero Coupon 2005 Fund, which
holds middle-term maturities, enjoyed a +12.5% return on the year, while Zero
Coupon 2000 Fund managed a +7.5% performance. Keep in mind that, with a little
less than one year to target maturity for the 2000 portfolio, it will begin to
take on characteristics similar to a money market fund. As the target maturity
date of December 2000 approaches, this portfolio will become increasingly less
sensitive to changes in interest rates, which will serve to reduce the
portfolio's risk but also diminish any chances for capital appreciation.
Going forward, we anticipate that future interest-rate changes will continue to
be the dominant factor in determining the portfolio's returns. Although
underlying concerns linger regarding the economy's strength, we find ourselves
in a profound environment of low inflation and interest rates that so far have
helped propel consumer spending. Should growth slow, however, the Fed may make
further changes to the federal funds target rate.
GRAPHIC MATERIAL (70)
This graph compares the performance of the Zero Coupon 2000 Fund as tracked by
the growth in value of a $10,000 investment, to that of the Merrill Lynch Zero
Coupon 5-Year Bond Total Return Index, the Consumer Price Index, and Merrill
Lynch Zero Coupon 1-Year Bond Total Return Index, from 3/14/89 - 12/31/98.
We are adding the Merrill Lynch Zero Coupon 1 Year Bond Total Return Index,
reflecting short-term bond performance as the portfolio nears its 2000 target
date.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2000 Fund
$10,000 Investment (3/14/98 - 12/31/98)
<TABLE>
<CAPTION>
Merrill Lynch Merrill Lynch
Zero Coupon 2000 Fund Zero Coupon 1-Year Bond Zero Coupon 5-Year Bond Consumer
Total Return Index Total Return Index Price Index
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.33% $10,033 0.40% $10,040 0.32% $10,032
4/30/89 $10,000 1.17% $10,150 2.17% $10,258 0.65% $10,097
5/31/89 $9,990 1.16% $10,268 3.06% $10,572 0.57% $10,155
6/30/89 $10,560 1.49% $10,421 3.60% $10,952 0.24% $10,179
7/31/89 $10,790 1.11% $10,537 3.59% $11,346 0.24% $10,203
8/31/89 $10,460 -0.10% $10,526 -2.85% $11,022 0.16% $10,220
9/30/89 $10,480 0.65% $10,595 0.41% $11,067 0.32% $10,252
10/31/89 $10,910 1.12% $10,713 2.92% $11,391 0.48% $10,302
11/30/89 $11,010 0.83% $10,802 1.27% $11,535 0.24% $10,326
12/31/89 $11,080 0.53% $10,860 0.08% $11,544 0.16% $10,343
1/31/90 $10,610 0.44% $10,907 -1.71% $11,347 1.03% $10,449
2/28/90 $10,600 0.60% $10,973 0.10% $11,358 0.47% $10,498
3/31/90 $10,592 0.58% $11,036 -0.01% $11,357 0.55% $10,556
4/30/90 $10,170 0.51% $11,093 -1.02% $11,241 0.16% $10,573
5/31/90 $10,664 1.14% $11,219 3.04% $11,583 0.23% $10,597
6/30/90 $10,932 0.81% $11,310 1.63% $11,772 0.54% $10,655
7/31/90 $11,076 1.03% $11,426 1.77% $11,980 0.38% $10,695
8/31/90 $10,582 0.66% $11,502 -1.31% $11,823 0.92% $10,794
9/30/90 $10,715 0.64% $11,576 0.95% $11,936 0.84% $10,884
10/31/90 $10,973 0.97% $11,688 2.05% $12,180 0.60% $10,950
11/30/90 $11,518 0.79% $11,780 2.67% $12,506 0.22% $10,974
12/31/90 $11,734 0.97% $11,894 1.73% $12,722 0.00% $10,974
1/31/91 $11,868 0.90% $12,001 1.02% $12,852 0.60% $11,039
2/28/91 $11,889 0.66% $12,081 0.35% $12,897 0.15% $11,056
3/31/91 $11,868 0.73% $12,169 0.37% $12,944 0.15% $11,073
4/30/91 $12,064 0.80% $12,266 1.59% $13,150 0.15% $11,089
5/31/91 $12,054 0.58% $12,337 0.31% $13,191 0.30% $11,122
6/30/91 $11,987 0.38% $12,384 -0.21% $13,163 0.29% $11,155
7/31/91 $12,147 0.77% $12,480 1.43% $13,352 0.15% $11,171
8/31/91 $12,615 0.97% $12,601 2.98% $13,749 0.29% $11,204
9/30/91 $13,072 0.78% $12,699 2.56% $14,101 0.44% $11,253
10/31/91 $13,157 0.83% $12,804 1.57% $14,323 0.15% $11,270
11/30/91 $13,338 0.96% $12,927 1.71% $14,568 0.29% $11,303
12/31/91 $13,933 1.13% $13,073 2.39% $14,916 0.07% $11,311
1/31/92 $13,487 0.35% $13,119 -1.66% $14,668 0.15% $11,328
2/29/92 $13,572 0.33% $13,162 0.17% $14,693 0.36% $11,368
3/31/92 $13,465 0.11% $13,177 -1.00% $14,546 0.51% $11,426
4/30/92 $13,519 0.91% $13,297 0.85% $14,670 0.14% $11,442
5/31/92 $13,848 0.53% $13,367 2.49% $15,035 0.14% $11,458
6/30/92 $14,249 0.63% $13,451 2.18% $15,363 0.36% $11,500
7/31/92 $14,880 0.83% $13,563 2.86% $15,802 0.21% $11,524
8/31/92 $15,080 0.36% $13,612 1.63% $16,060 0.28% $11,556
9/30/92 $15,501 0.69% $13,706 2.20% $16,413 0.28% $11,588
10/31/92 $15,102 -0.15% $13,685 -2.20% $16,052 0.35% $11,629
11/30/92 $14,947 0.12% $13,702 -1.12% $15,872 0.14% $11,645
12/31/92 $15,379 0.69% $13,796 1.86% $16,168 -0.07% $11,637
1/31/93 $15,789 0.70% $13,893 3.06% $16,662 0.49% $11,694
2/28/93 $16,387 0.38% $13,946 2.35% $17,054 0.35% $11,735
3/31/93 $16,587 0.26% $13,982 0.43% $17,127 0.35% $11,776
4/30/93 $16,664 0.44% $14,043 1.19% $17,331 0.28% $11,809
5/31/93 $16,653 -0.04% $14,038 -0.51% $17,243 0.14% $11,826
6/30/93 $17,308 0.48% $14,105 2.27% $17,634 0.14% $11,842
7/31/93 $17,412 0.29% $14,146 0.08% $17,648 0.00% $11,842
8/31/93 $17,863 0.48% $14,214 2.35% $18,063 0.28% $11,875
9/30/93 $17,979 0.28% $14,254 0.49% $18,151 0.21% $11,900
10/31/93 $18,129 0.23% $14,287 0.05% $18,160 0.41% $11,949
11/30/93 $17,701 0.20% $14,315 -1.01% $17,977 0.07% $11,957
12/31/93 $17,863 0.41% $14,374 0.53% $18,072 0.00% $11,957
1/31/94 $18,176 0.44% $14,437 1.41% $18,327 0.27% $11,990
2/28/94 $17,528 -0.17% $14,413 -2.34% $17,898 0.34% $12,030
3/31/94 $16,938 0.01% $14,414 -2.58% $17,437 0.34% $12,071
4/30/94 $16,729 -0.08% $14,402 -1.22% $17,224 0.14% $12,088
5/31/94 $16,729 0.25% $14,438 0.07% $17,236 0.07% $12,097
6/30/94 $16,720 0.38% $14,493 -0.21% $17,200 0.34% $12,138
7/31/94 $17,050 0.65% $14,588 1.84% $17,516 0.27% $12,171
8/31/94 $17,050 0.42% $14,649 0.33% $17,574 0.40% $12,219
9/30/94 $16,720 0.11% $14,665 -1.70% $17,275 0.27% $12,252
10/31/94 $16,633 0.35% $14,716 -0.21% $17,239 0.07% $12,261
11/30/94 $16,548 -0.10% $14,701 -0.79% $17,103 0.13% $12,277
12/31/94 $16,658 0.33% $14,750 0.90% $17,257 0.00% $12,277
1/31/95 $16,988 1.09% $14,911 1.93% $17,590 0.40% $12,326
2/28/95 $17,514 1.01% $15,061 1.90% $17,924 0.40% $12,375
3/31/95 $17,612 0.66% $15,161 0.41% $17,997 0.33% $12,416
4/30/95 $17,869 0.65% $15,259 1.56% $18,278 0.33% $12,457
5/31/95 $18,798 1.12% $15,430 4.76% $19,148 0.20% $12,482
6/30/95 $18,951 0.56% $15,517 0.82% $19,305 0.20% $12,507
7/31/95 $18,823 0.38% $15,576 -0.49% $19,211 0.00% $12,507
8/31/95 $19,040 0.72% $15,688 0.96% $19,395 0.26% $12,539
9/30/95 $19,181 0.26% $15,729 0.76% $19,542 0.20% $12,565
10/31/95 $19,526 0.61% $15,824 1.57% $19,849 0.33% $12,606
11/30/95 $19,858 0.68% $15,932 1.86% $20,218 -0.07% $12,597
12/31/95 $20,101 0.63% $16,032 1.26% $20,473 -0.07% $12,588
1/31/96 $20,331 0.64% $16,135 1.09% $20,696 0.59% $12,663
2/29/96 $19,935 0.17% $16,163 -1.90% $20,303 0.32% $12,703
3/31/96 $19,692 0.21% $16,196 -1.27% $20,045 0.52% $12,769
4/30/96 $19,539 0.28% $16,242 -1.13% $19,819 0.39% $12,819
5/31/96 $19,449 0.44% $16,313 -0.49% $19,722 0.19% $12,843
6/30/96 $19,680 0.52% $16,398 1.47% $20,012 0.06% $12,851
7/31/96 $19,735 0.47% $16,475 0.01% $20,014 0.19% $12,875
8/31/96 $19,707 0.55% $16,566 -0.26% $19,962 0.19% $12,900
9/30/96 $20,033 0.64% $16,672 1.85% $20,331 0.32% $12,941
10/31/96 $20,480 0.76% $16,799 2.43% $20,825 0.32% $12,983
11/30/96 $20,792 0.59% $16,898 1.88% $21,216 0.19% $13,007
12/31/96 $20,588 0.19% $16,930 -1.43% $20,913 0.00% $13,007
1/31/97 $20,656 0.50% $17,014 0.25% $20,965 0.32% $13,049
2/28/97 $20,656 0.36% $17,076 -0.06% $20,953 0.31% $13,089
3/31/97 $20,494 0.21% $17,111 -1.28% $20,684 0.25% $13,122
4/30/97 $20,724 0.65% $17,223 1.53% $21,001 0.12% $13,138
5/31/97 $20,900 0.67% $17,338 0.91% $21,192 -0.06% $13,130
6/30/97 $21,076 0.51% $17,427 1.08% $21,421 0.12% $13,146
7/31/97 $21,513 0.76% $17,559 3.07% $22,079 0.12% $13,161
8/31/97 $21,396 0.30% $17,612 -1.23% $21,807 0.19% $13,186
9/30/97 $21,629 0.56% $17,710 1.52% $22,138 0.25% $13,219
10/31/97 $21,877 0.60% $17,817 1.76% $22,528 0.25% $13,253
11/30/97 $21,891 0.24% $17,859 0.00% $22,528 -0.06% $13,245
12/31/97 $22,051 0.56% $17,959 1.17% $22,792 -0.12% $13,229
1/31/98 $22,372 0.65% $18,076 1.83% $23,209 0.19% $13,254
2/28/98 $22,328 0.18% $18,109 -0.42% $23,111 0.19% $13,279
3/31/98 $22,386 0.42% $18,185 0.17% $23,151 0.19% $13,304
4/30/98 $22,503 0.51% $18,277 0.43% $23,250 0.18% $13,328
5/31/98 $22,649 0.45% $18,360 0.82% $23,441 0.18% $13,352
6/30/98 $22,777 0.46% $18,444 0.83% $23,635 0.12% $13,368
7/31/98 $22,889 0.46% $18,529 0.23% $23,690 0.12% $13,384
8/31/98 $23,225 0.85% $18,686 3.23% $24,455 0.12% $13,400
9/30/98 $23,594 0.91% $18,856 3.43% $25,294 0.12% $13,416
10/31/98 $23,690 0.52% $18,955 -0.16% $25,253 0.24% $13,449
11/30/98 $23,642 0.24% $19,000 -0.73% $25,069 0.00% $13,449
12/31/98 $23,706 0.27% 0.40% $19,076 0.53% $25,202 -0.06% $13,440
</TABLE>
WE ARE ADDING THE MERRILL LYNCH ZERO COUPON 1-YEAR BOND TOTAL RETURN INDEX,
REFLECTING SHORT-TERM BOND PERFORMANCE AS THE PORTFOLIO NEARS ITS 2000 TARGET
DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (71)
This chart shows the average annual total return for the Zero Coupon 2000 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ------------------------------------------
<S> <C>
1-Year +7.50%
5-Year +5.82%
Since Inception (3/14/89) +9.21%
</TABLE>
57
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
WE ARE ADDING THE MERRILL LYNCH ZERO COUPON 5-YEAR BOND TOTAL RETURN INDEX,
REFLECTING SHORTER-TERM BOND PERFORMANCE AS THE PORTFOLIO NEARS ITS 2005 TARGET
DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT
DOES NOT INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY
AND LIFE INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD
BEEN INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE
SALES CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (73)
This chart shows the average annual total return for the Zero Coupon 2005 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +12.53%
5-Year +8.24%
Since Inception (3/14/89) +11.35%
</TABLE>
GRAPHIC MATERIAL (72)
This graph compares the performance of the Zero Coupon 2005 Fund as tracked by
the in value of a $10,000 investment , to that of the Merrill Lynch Zero Coupon
10-Year Bond Total Return Index, the Consumer Price Index, and the Merrill Lynch
Zero Coupon 5 Year Bond Total Return Index, from 3/14/89 - 12/31/98.
We are adding the Merrill Lynch Zero Coupon 5-Year Bond Total return Index,
reflecting shorter-term bond performance as the portfolio nears its 2005 target
date.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2005 Fund
$10,000 Investment (3/14/89 - 12/31/98)
[Line Graph]
<TABLE>
<CAPTION>
Merrill Lynch Zero Merrill Lynch Zero
Zero Coupon Coupon 10-Year Bond Coupon 5-Year Bond Consumer
2005 Fund Total Return Index Total Retunr Index Price Index
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.40% $10,040 0.64% $10,064 0.32% $10,032
4/30/89 $10,000 2.17% $10,258 2.74% $10,339 0.65% $10,097
5/31/89 $10,070 3.06% $10,572 4.09% $10,762 0.57% $10,155
6/30/89 $11,310 3.60% $10,952 5.97% $11,405 0.24% $10,179
7/31/89 $11,290 3.59% $11,346 2.71% $11,714 0.24% $10,203
8/31/89 $10,850 -2.85% $11,022 -3.02% $11,360 0.16% $10,220
9/30/89 $10,870 0.41% $11,067 0.42% $11,408 0.32% $10,252
10/31/89 $11,500 2.92% $11,391 4.09% $11,874 0.48% $10,302
11/30/89 $11,580 1.27% $11,535 0.83% $11,973 0.24% $10,326
12/31/89 $11,530 0.08% $11,544 -0.01% $11,972 0.16% $10,343
1/31/90 $10,630 -1.71% $11,347 -4.06% $11,486 1.03% $10,449
2/28/90 $10,640 0.10% $11,358 -0.22% $11,460 0.47% $10,498
3/31/90 $10,598 -0.01% $11,357 -0.08% $11,451 0.55% $10,556
4/30/90 $10,024 -1.02% $11,241 -2.80% $11,131 0.16% $10,573
5/31/90 $10,746 3.04% $11,583 4.78% $11,663 0.23% $10,597
6/30/90 $11,065 1.63% $11,772 2.37% $11,939 0.54% $10,655
7/31/90 $11,171 1.77% $11,980 1.09% $12,069 0.38% $10,695
8/31/90 $10,290 -1.31% $11,823 -4.73% $11,498 0.92% $10,794
9/30/90 $10,502 0.95% $11,936 1.14% $11,629 0.84% $10,884
10/31/90 $10,746 2.05% $12,180 3.23% $12,005 0.60% $10,950
11/30/90 $11,521 2.67% $12,506 4.35% $12,527 0.22% $10,974
12/31/90 $11,840 1.73% $12,722 2.25% $12,809 0.00% $10,974
1/31/91 $11,978 1.02% $12,852 1.01% $12,938 0.60% $11,039
2/28/91 $11,978 0.35% $12,897 0.13% $12,955 0.15% $11,056
3/31/91 $11,893 0.37% $12,944 0.71% $13,047 0.15% $11,073
4/30/91 $12,127 1.59% $13,150 1.63% $13,260 0.15% $11,089
5/31/91 $11,999 0.31% $13,191 -0.12% $13,244 0.30% $11,122
6/30/91 $11,857 -0.21% $13,163 -0.70% $13,151 0.29% $11,155
7/31/91 $12,066 1.43% $13,351 1.76% $13,383 0.15% $11,171
8/31/91 $12,663 2.98% $13,749 3.97% $13,914 0.29% $11,204
9/30/91 $13,292 2.56% $14,101 3.44% $14,393 0.44% $11,253
10/31/91 $13,237 1.57% $14,323 0.48% $14,462 0.15% $11,270
11/30/91 $13,303 1.71% $14,568 1.41% $14,666 0.29% $11,303
12/31/91 $14,065 2.39% $14,916 5.47% $15,468 0.07% $11,311
1/31/92 $13,579 -1.66% $14,668 -4.18% $14,821 0.15% $11,328
2/29/92 $13,612 0.17% $14,693 0.60% $14,910 0.36% $11,368
3/31/92 $13,513 -1.00% $14,546 -1.29% $14,718 0.51% $11,426
4/30/92 $13,480 0.85% $14,670 -0.42% $14,656 0.14% $11,442
5/31/92 $13,976 2.49% $15,035 2.91% $15,083 0.14% $11,458
6/30/92 $14,216 2.18% $15,363 2.34% $15,436 0.36% $11,500
7/31/92 $15,016 2.86% $15,802 4.63% $16,150 0.21% $11,524
8/31/92 $15,132 1.63% $16,060 1.13% $16,333 0.28% $11,556
9/30/92 $15,711 2.20% $16,413 3.10% $16,839 0.28% $11,588
10/31/92 $15,143 -2.20% $16,052 -2.91% $16,349 0.35% $11,629
11/30/92 $15,271 -1.12% $15,872 -0.09% $16,334 0.14% $11,645
12/31/92 $15,793 1.86% $16,168 3.46% $16,899 -0.07% $11,637
1/31/93 $16,291 3.06% $16,662 3.99% $17,574 0.49% $11,694
2/28/93 $17,196 2.35% $17,054 3.91% $18,261 0.35% $11,735
3/31/93 $17,358 0.43% $17,127 0.28% $18,312 0.35% $11,776
4/30/93 $17,346 1.19% $17,331 1.40% $18,568 0.28% $11,809
5/31/93 $17,346 -0.51% $17,243 -0.55% $18,466 0.14% $11,826
6/30/93 $18,520 2.27% $17,634 5.49% $19,480 0.14% $11,842
7/31/93 $18,724 0.08% $17,648 0.82% $19,640 0.00% $11,842
8/31/93 $19,360 2.35% $18,063 3.82% $20,390 0.28% $11,875
9/30/93 $19,564 0.49% $18,151 1.19% $20,633 0.21% $11,900
10/31/93 $19,840 0.05% $18,160 0.42% $20,719 0.41% $11,949
11/30/93 $19,084 -1.01% $17,977 -3.33% $20,029 0.07% $11,957
12/31/93 $19,300 0.53% $18,072 0.88% $20,206 0.00% $11,957
1/31/94 $19,864 1.41% $18,327 2.92% $20,796 0.27% $11,990
2/28/94 $18,748 -2.34% $17,898 -4.77% $19,804 0.34% $12,030
3/31/94 $17,728 -2.58% $17,436 -5.14% $18,786 0.34% $12,071
4/30/94 $17,452 -1.22% $17,224 -1.57% $18,491 0.14% $12,088
5/31/94 $17,416 0.07% $17,236 -0.50% $18,398 0.07% $12,097
6/30/94 $17,301 -0.21% $17,200 -0.75% $18,260 0.34% $12,138
7/31/94 $17,833 1.84% $17,516 2.87% $18,784 0.27% $12,171
8/31/94 $17,783 0.33% $17,574 0.17% $18,816 0.40% $12,219
9/30/94 $17,136 -1.70% $17,275 -3.60% $18,139 0.27% $12,252
10/31/94 $17,034 -0.21% $17,239 -0.73% $18,007 0.07% $12,261
11/30/94 $17,136 -0.79% $17,103 0.48% $18,093 0.13% $12,277
12/31/94 $17,453 0.90% $17,257 1.74% $18,408 0.00% $12,277
1/31/95 $17,846 1.93% $17,590 2.64% $18,894 0.40% $12,326
2/28/95 $18,442 1.90% $17,924 3.85% $19,621 0.40% $12,375
3/31/95 $18,594 0.41% $17,997 0.69% $19,757 0.33% $12,416
4/30/95 $19,013 1.56% $18,278 1.95% $20,142 0.33% $12,457
5/31/95 $20,662 4.76% $19,148 8.38% $21,830 0.20% $12,482
6/30/95 $20,812 0.82% $19,305 1.32% $22,118 0.20% $12,507
7/31/95 $20,442 -0.49% $19,211 -1.65% $21,753 0.00% $12,507
8/31/95 $20,879 0.96% $19,395 1.98% $22,184 0.26% $12,539
9/30/95 $21,249 0.76% $19,542 1.65% $22,550 0.20% $12,565
10/31/95 $21,831 1.57% $19,849 2.53% $23,120 0.33% $12,606
11/30/95 $22,427 1.86% $20,218 3.06% $23,828 -0.07% $12,597
12/31/95 $22,996 1.26% $20,473 2.44% $24,409 -0.07% $12,588
1/31/96 $23,075 1.09% $20,696 0.21% $24,460 0.59% $12,663
2/29/96 $21,977 -1.90% $20,303 -4.75% $23,298 0.32% $12,703
3/31/96 $21,633 -1.27% $20,045 -1.92% $22,851 0.52% $12,769
4/30/96 $21,236 -1.13% $19,819 -2.35% $22,314 0.39% $12,819
5/31/96 $20,998 -0.49% $19,722 -0.64% $22,171 0.19% $12,843
6/30/96 $21,466 1.47% $20,011 2.24% $22,668 0.06% $12,851
7/31/96 $21,466 0.01% $20,013 -0.03% $22,661 0.19% $12,875
8/31/96 $21,270 -0.26% $19,961 -1.08% $22,416 0.19% $12,900
9/30/96 $21,844 1.85% $20,331 2.97% $23,082 0.32% $12,941
10/31/96 $22,712 2.43% $20,825 3.95% $23,994 0.32% $12,983
11/30/96 $23,383 1.88% $21,216 3.56% $24,848 0.19% $13,007
12/31/96 $22,880 -1.43% $20,913 -2.74% $24,167 0.00% $13,007
1/31/97 $22,796 0.25% $20,965 -0.40% $24,071 0.32% $13,049
2/28/97 $22,768 -0.06% $20,953 0.01% $24,073 0.31% $13,089
3/31/97 $22,292 -1.28% $20,684 -2.88% $23,380 0.25% $13,122
4/30/97 $22,796 1.53% $21,001 2.69% $24,009 0.12% $13,138
5/31/97 $23,034 0.91% $21,192 1.18% $24,292 -0.06% $13,130
6/30/97 $23,374 1.08% $21,421 1.77% $24,722 0.12% $13,146
7/31/97 $24,480 3.07% $22,078 5.68% $26,126 0.12% $13,161
8/31/97 $23,927 -1.23% $21,807 -2.96% $25,353 0.19% $13,186
9/30/97 $24,480 1.52% $22,138 2.89% $26,085 0.25% $13,219
10/31/97 $25,093 1.76% $22,528 3.12% $26,899 0.25% $13,253
11/30/97 $25,123 0.00% $22,528 0.51% $27,037 -0.06% $13,245
12/31/97 $25,482 1.17% $22,792 1.95% $27,564 -0.12% $13,229
1/31/98 $26,035 1.83% $23,209 2.07% $28,134 0.19% $13,254
2/28/98 $25,885 -0.42% $23,111 -0.59% $27,968 0.19% $13,279
3/31/98 $25,915 0.17% $23,150 0.06% $27,985 0.19% $13,304
4/30/98 $26,005 0.43% $23,250 0.35% $28,083 0.18% $13,328
5/31/98 $26,408 0.82% $23,441 1.59% $28,530 0.18% $13,352
6/30/98 $26,719 0.83% $23,635 1.82% $29,049 0.12% $13,368
7/31/98 $26,719 0.23% $23,690 0.11% $29,081 0.12% $13,384
8/31/98 $27,672 3.23% $24,455 5.03% $30,544 0.12% $13,400
9/30/98 $28,852 3.43% $25,294 5.44% $32,205 0.12% $13,416
10/31/98 $28,707 -0.16% $25,253 -1.81% $31,622 0.24% $13,449
11/30/98 $28,497 -0.73% $25,069 0.36% $31,736 0.00% $13,449
12/31/98 $28,674 0.62% 0.53% $25,202 0.34% $31,844 -0.06% $13,440
</TABLE>
THE GRAPH SHOWS THE MERRILL LYNCH ZERO COUPON 20- AND 10-YEAR BOND TOTAL RETURN
INDICES, REFLECTING THE PORTFOLIO'S CHANGING COMPOSITION AS IT MOVES TOWARD ITS
2010 TARGET DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (75)
This chart shows the top 10 holidays based on the percentage of total net assets
on 12/31/98 for the Money Market Fund.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year +14.45%
5-Year +10.54%
Since Inception (3/14/89) +12.61%
</TABLE>
GRAPHIC MATERIAL (74)
This graph compares the performance of the Zero Coupon 2010 Fund as tracked by
the growth in value of a $10,000 investment, to that of the Merrill Lynch Zero
Coupon 10-Year Bond Total Return Index, the Consumer Price Index, and the
Merrill Lynch Zero Coupon 20-Year Bond Total Return Index from
3/14/89 - 12/31/98.
The graph shows the Merrill Lynch Zero Coupon 20- and 10-Year Bod Total Return
Indices, reflecting the portfolio's changing composition as it moves toward its
2010 target date.
Performance shown in the graph reflects all fund operating expenses but
does not include any fees, charges or expenses imposed by the variable annuity
and life insurance contracts that use the Franklin Valumark Funds. If they had
been included, performance would have been lower. see the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2010 Fund
$10,000 Investment (3/14/89 - 12/31/98)
<TABLE>
<CAPTION>
Merrill Lynch Zero Merrill Lynch Zero Consumer
Zero Coupon Coupon 10-Year Bond Coupon 20-Year Bond Price
2010 Fund Total Return Index Total Return Index Index
<S> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.64% $10,064 1.09% $10,109 0.32% $10,032
4/30/89 $10,000 2.74% $10,339 3.81% $10,494 0.65% $10,097
5/31/89 $10,000 4.09% $10,762 6.90% $11,219 0.57% $10,155
6/30/89 $11,290 5.97% $11,405 10.43% $12,389 0.24% $10,179
7/31/89 $11,250 2.71% $11,714 0.57% $12,460 0.24% $10,203
8/31/89 $10,790 -3.02% $11,360 -4.96% $11,842 0.16% $10,220
9/30/89 $10,860 0.42% $11,408 0.88% $11,947 0.32% $10,252
10/31/89 $11,630 4.09% $11,874 6.69% $12,747 0.48% $10,302
11/30/89 $11,720 0.83% $11,973 1.78% $12,974 0.24% $10,326
12/31/89 $11,610 -0.01% $11,972 -0.52% $12,907 0.16% $10,343
1/31/90 $10,580 -4.06% $11,486 -7.52% $11,936 1.03% $10,449
2/28/90 $10,530 -0.22% $11,460 -2.23% $11,669 0.47% $10,498
3/31/90 $10,400 -0.08% $11,451 -0.95% $11,559 0.55% $10,556
4/30/90 $9,652 -2.80% $11,131 -5.95% $10,871 0.16% $10,573
5/31/90 $10,617 4.78% $11,663 9.78% $11,934 0.23% $10,597
6/30/90 $11,064 2.37% $11,939 4.13% $12,427 0.54% $10,655
7/31/90 $11,136 1.09% $12,069 -0.41% $12,376 0.38% $10,695
8/31/90 $9,912 -4.73% $11,498 -11.02% $11,012 0.92% $10,794
9/30/90 $10,150 1.14% $11,629 2.08% $11,241 0.84% $10,884
10/31/90 $10,358 3.23% $12,005 2.90% $11,567 0.60% $10,950
11/30/90 $11,271 4.35% $12,527 9.01% $12,609 0.22% $10,974
12/31/90 $11,676 2.25% $12,809 2.64% $12,941 0.00% $10,974
1/31/91 $11,853 1.01% $12,938 2.05% $13,206 0.60% $11,039
2/28/91 $11,811 0.13% $12,955 -0.90% $13,087 0.15% $11,056
3/31/91 $11,666 0.71% $13,047 0.73% $13,183 0.15% $11,073
4/30/91 $11,946 1.63% $13,260 1.81% $13,421 0.15% $11,089
5/31/91 $11,686 -0.12% $13,244 -1.15% $13,267 0.30% $11,122
6/30/91 $11,412 -0.70% $13,151 -2.01% $13,000 0.29% $11,155
7/31/91 $11,619 1.76% $13,383 2.09% $13,273 0.15% $11,171
8/31/91 $12,362 3.97% $13,914 5.90% $14,056 0.29% $11,204
9/30/91 $13,061 3.44% $14,393 5.16% $14,782 0.44% $11,253
10/31/91 $12,864 0.48% $14,462 -1.57% $14,550 0.15% $11,270
11/30/91 $12,744 1.41% $14,666 0.83% $14,671 0.29% $11,303
12/31/91 $13,749 5.47% $15,468 8.08% $15,856 0.07% $11,311
1/31/92 $13,246 -4.18% $14,821 -4.35% $15,166 0.15% $11,328
2/29/92 $13,290 0.60% $14,910 0.45% $15,233 0.36% $11,368
3/31/92 $13,235 -1.29% $14,718 -1.62% $14,987 0.51% $11,426
4/30/92 $13,050 -0.42% $14,656 -1.81% $14,716 0.14% $11,442
5/31/92 $13,759 2.91% $15,083 4.23% $15,338 0.14% $11,458
6/30/92 $13,776 2.34% $15,436 0.28% $15,382 0.36% $11,500
7/31/92 $14,598 4.63% $16,150 6.73% $16,416 0.21% $11,524
8/31/92 $14,679 1.13% $16,333 -0.33% $16,361 0.28% $11,556
9/30/92 $14,923 3.10% $16,839 0.84% $16,498 0.28% $11,588
10/31/92 $14,378 -2.91% $16,349 -2.08% $16,154 0.35% $11,629
11/30/92 $14,772 -0.09% $16,334 2.34% $16,532 0.14% $11,645
12/31/92 $15,467 3.46% $16,899 4.24% $17,233 -0.07% $11,637
1/31/93 $15,792 3.99% $17,574 3.29% $17,800 0.49% $11,694
2/28/93 $16,707 3.91% $18,261 6.15% $18,895 0.35% $11,735
3/31/93 $17,054 0.28% $18,312 -0.70% $18,762 0.35% $11,776
4/30/93 $16,881 1.40% $18,568 1.23% $18,993 0.28% $11,809
5/31/93 $16,985 -0.55% $18,466 0.97% $19,178 0.14% $11,826
6/30/93 $18,058 5.49% $19,480 7.84% $20,681 0.14% $11,842
7/31/93 $18,664 0.82% $19,640 4.37% $21,585 0.00% $11,842
8/31/93 $19,617 3.82% $20,390 6.44% $22,976 0.28% $11,875
9/30/93 $19,778 1.19% $20,633 -0.32% $22,903 0.21% $11,900
10/31/93 $20,162 0.42% $20,719 1.83% $23,322 0.41% $11,949
11/30/93 $19,332 -3.33% $20,029 -4.02% $22,384 0.07% $11,957
12/31/93 $19,407 0.88% $20,206 -0.35% $22,305 0.00% $11,957
1/31/94 $20,186 2.92% $20,796 4.00% $23,197 0.27% $11,990
2/28/94 $18,788 -4.77% $19,804 -6.86% $21,605 0.34% $12,030
3/31/94 $17,662 -5.14% $18,786 -6.29% $20,246 0.34% $12,071
4/30/94 $17,365 -1.57% $18,491 -2.58% $19,723 0.14% $12,088
5/31/94 $17,092 -0.50% $18,398 -3.06% $19,119 0.07% $12,097
6/30/94 $16,872 -0.75% $18,260 -1.59% $18,816 0.34% $12,138
7/31/94 $17,747 2.87% $18,784 6.34% $20,008 0.27% $12,171
8/31/94 $17,389 0.17% $18,816 -3.03% $19,402 0.40% $12,219
9/30/94 $16,580 -3.60% $18,139 -5.62% $18,312 0.27% $12,252
10/31/94 $16,467 -0.73% $18,007 -0.58% $18,206 0.07% $12,261
11/30/94 $16,759 0.48% $18,093 2.44% $18,650 0.13% $12,277
12/31/94 $17,277 1.74% $18,408 3.71% $19,342 0.00% $12,277
1/31/95 $17,728 2.64% $18,894 3.85% $20,088 0.40% $12,326
2/28/95 $18,259 3.85% $19,621 3.14% $20,719 0.40% $12,375
3/31/95 $18,445 0.69% $19,757 1.24% $20,975 0.33% $12,416
4/30/95 $18,949 1.95% $20,142 2.21% $21,440 0.33% $12,457
5/31/95 $21,297 8.38% $21,830 14.50% $24,549 0.20% $12,482
6/30/95 $21,402 1.32% $22,118 1.35% $24,881 0.20% $12,507
7/31/95 $20,841 -1.65% $21,753 -2.82% $24,178 0.00% $12,507
8/31/95 $21,456 1.98% $22,184 3.95% $25,134 0.26% $12,539
9/30/95 $21,976 1.65% $22,550 2.90% $25,862 0.20% $12,565
10/31/95 $23,002 2.53% $23,120 5.56% $27,300 0.33% $12,606
11/30/95 $23,781 3.06% $23,828 3.76% $28,326 -0.07% $12,597
12/31/95 $24,670 2.44% $24,409 4.64% $29,640 -0.07% $12,588
1/31/96 $24,615 0.21% $24,460 -0.96% $29,355 0.59% $12,663
2/29/96 $22,728 -4.75% $23,298 -9.22% $26,648 0.32% $12,703
3/31/96 $22,181 -1.92% $22,851 -3.82% $25,631 0.52% $12,769
4/30/96 $21,593 -2.35% $22,314 -3.62% $24,702 0.39% $12,819
5/31/96 $21,388 -0.64% $22,171 0.01% $24,706 0.19% $12,843
6/30/96 $22,047 2.24% $22,668 3.48% $25,565 0.06% $12,851
7/31/96 $22,003 -0.03% $22,661 -0.26% $25,499 0.19% $12,875
8/31/96 $21,516 -1.08% $22,416 -3.31% $24,655 0.19% $12,900
9/30/96 $22,386 2.97% $23,082 4.98% $25,884 0.32% $12,941
10/31/96 $23,639 3.95% $23,994 6.58% $27,586 0.32% $12,983
11/30/96 $24,729 3.56% $24,848 6.20% $29,297 0.19% $13,007
12/31/96 $24,007 -2.74% $24,167 -4.62% $27,942 0.00% $13,007
1/31/97 $23,653 -0.40% $24,071 -1.81% $27,435 0.32% $13,049
2/28/97 $23,609 0.01% $24,073 -0.26% $27,364 0.31% $13,089
3/31/97 $22,902 -2.88% $23,380 -4.70% $26,077 0.25% $13,122
4/30/97 $23,639 2.69% $24,009 4.08% $27,140 0.12% $13,138
5/31/97 $23,933 1.18% $24,292 1.29% $27,491 -0.06% $13,130
6/30/97 $24,453 1.77% $24,722 3.29% $28,395 0.12% $13,146
7/31/97 $26,337 5.68% $26,126 11.42% $31,638 0.12% $13,161
8/31/97 $25,254 -2.96% $25,353 -5.72% $29,827 0.19% $13,186
9/30/97 $26,180 2.89% $26,085 5.17% $31,370 0.25% $13,219
10/31/97 $27,200 3.12% $26,899 5.98% $33,245 0.25% $13,253
11/30/97 $27,420 0.51% $27,037 2.82% $34,182 -0.06% $13,245
12/31/97 $27,985 1.95% $27,564 2.73% $35,114 -0.12% $13,229
1/31/98 $28,675 2.07% $28,134 2.28% $35,913 0.19% $13,254
2/28/98 $28,409 -0.59% $27,968 -1.51% $35,372 0.19% $13,279
3/31/98 $28,424 0.06% $27,985 0.50% $35,549 0.19% $13,304
4/30/98 $28,487 0.35% $28,083 -0.02% $35,543 0.18% $13,328
5/31/98 $29,162 1.59% $28,530 3.22% $36,688 0.18% $13,352
6/30/98 $29,859 1.82% $29,049 4.29% $38,263 0.12% $13,368
7/31/98 $29,708 0.11% $29,081 -1.47% $37,699 0.12% $13,384
8/31/98 $31,187 5.03% $30,544 6.69% $40,221 0.12% $13,400
9/30/98 $32,768 5.44% $32,205 3.02% $41,435 0.12% $13,416
10/31/98 $31,944 -1.81% $31,622 -4.13% $39,722 0.24% $13,449
11/30/98 $32,062 0.36% $31,736 3.84% $41,249 0.00% $13,449
12/31/98 $32,028 0.34% $31,844 -1.27% $40,724 -0.06% $13,440
Total Return 220.28% 218.44% 307.24% 34.40%
</TABLE>
58
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
MONEY MARKET FUND
The domestic economy continued to grow at a healthy pace during the period under
review. Higher income levels coupled with a robust real estate market and
increasing stock prices helped fuel the consumer sector, which was the primary
driver of domestic growth. Consumption also appeared to buoy the labor market,
with the unemployment rate reaching 4.5% for 1998, the lowest in 28 years. The
overall economy, as measured by U.S. Gross Domestic Product, grew 3.9% in 1998,
while many fourth quarter projections remain above the Federal Reserve Board's
(the Fed's) targeted long-term growth rate of 2.50%.(1)
Meanwhile, exports were hit hard by the emerging markets crisis that prevailed
for much of the reporting period, hampering the U.S. manufacturing sector and
producing record trade deficits. As a result, gains in the consumer sector stood
in stark contrast to declines in the manufacturing and export sectors. Increased
competition from low-cost imports exacerbated rising domestic wage costs and a
weakening U.S. export sector.
The extent of problems in emerging economies apparently took the financial
community by surprise. Many institutional investors became averse to virtually
any security with credit risk, which paralyzed the credit markets. An ensuing
"flight to quality" fueled tremendous demand for U.S. Treasuries, a traditional
safe haven in times of market and political turmoil. The yield on three-month
Treasury bills, usually a reasonable proxy for the fund, declined from 5.35% on
January 2, 1998, to 4.48% on December 31, 1998, falling as low as 3.65% on
October 16, 1998, before rebounding.(2) Put into a historical context,
three-month Treasury yields have averaged 4.91% over the past five years,
fluctuating from as low as 2.92% on January 26, 1994, to as high as 5.88% on
February 1, 1995. The "credit crunch" prompted the Fed to cut the federal funds
target rate three times over seven weeks, for a total of 75 basis points
(0.75%), bringing it to 4.75% on November 17, 1998. This revitalized the credit
markets and spurred equity prices in the process. Reflecting lower short-term
interest rates, the fund's seven-day yield during the reporting period declined
from 5.28% on January 2, 1998, to 3.38% on December 31, 1998.
TOP 10 HOLDINGS
Money Market Fund
12/31/98
GRAPHIC MATERIAL (76)
This chart shows the average annual total return for the Zero Coupon 2010 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
% OF TOTAL
SECURITY NAME NET ASSETS
- -------------------------------------------------------
<S> <C>
U.S. Treasury Repo 4.81%
General Electric Capital Corp. 4.81%
National Rural Utilities
Coop. Finance Corp. 4.21%
Campbell Soup Co. 4.05%
Province of British Columbia 4.04%
American Express
Credit Corp. 3.61%
Walt Disney Co. 3.61%
Associates Corp. of
North America 3.60%
Coca Cola Co. 3.60%
Dupont De Nemours Co. 3.60%
</TABLE>
1. Source: Bureau of Labor Statistics.
2. Bond prices are inversely related to their yields. An increase in price
leads to a corresponding decrease in yield.
59
<PAGE>
We continue to invest the fund's assets in only high quality money market
securities. For example, over 75% of the paper purchased by the fund carries
long-term credit ratings of "AA" or higher by Standard & Poor's and Moody's, two
national credit rating agencies.(3) Consistent with the fund's goal of providing
shareholders with a higher-quality and conservative investment vehicle, we do
not invest the fund's cash in derivatives or other potentially volatile
securities that we believe involve undue risk.
Going forward, underlying concerns linger regarding the economy's strength.
Balanced against these concerns, however, remains a profound environment of low
inflation and interest rates that have so far helped propel consumer spending.
Additionally, should economic growth slow, the Fed may make further changes to
the federal funds target rate.
3. This does not indicate Standard & Poor's and Moody's ratings of the fund.
60
<PAGE>
IMPORTANT ENDNOTES TO
PERFORMANCE INFORMATION
Total return of the portfolio is the percentage change in value of a
hypothetical $10,000 investment over the indicated periods and includes
reinvestment of dividends and capital gains. Inception dates of the portfolios
may have preceded the effective dates of the subaccounts, contracts, or their
availability in all states. Performance data is historical and cannot predict or
guarantee future results. Principal value and investment return will fluctuate
with market conditions, and you may have a gain or loss when you withdraw your
money.
When reviewing the index comparisons, please keep in mind that indices have a
number of inherent performance differentials over the Valuemark portfolios.
First, unlike the Valuemark portfolios, which must hold a minimum amount of cash
to maintain liquidity, indices do not have a cash component. Second, the
Valuemark portfolios are actively managed and, thus, are subject to management
fees to cover salaries of securities analysts or portfolio managers in addition
to other expenses. Indices are unmanaged and do not include any commissions or
other expenses typically associated with investing in securities. Third, indices
often contain a different mix of securities than the portfolio to which they are
compared. Additionally, please remember that indices are simply a measure of
performance and cannot be invested in directly.
61
<PAGE>
INDEX DEFINITIONS
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER PRICE INDEX Measure of the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the United States, published by the
Bureau of Labor Statistics.
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT SUISSE FIRST BOSTON The index is an unmanaged, trader-priced portfolio constructed to mirror the
HIGH YIELD (CSFB HY) INDEX high yield debt market. The index has several modules representing different
sectors of the high yield market including a cash paying module, a zerofix
module, a pay-in-kind module, and a defaulted module. The modular nature of the
index allows customization of data to meet client needs. The index is divided
into other categories including industry, rating, seniority, liquidity, market
value, security price range, yield range and other sector divisions. The CSFB HY
Index follows a total of 250 sectors. CS First Boston has maintained the index
since January 1986. While the index is priced and run weekly, monthly returns
are typically used for performance attribution.
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL TIMES/ Franklin Templeton customizes this index using 50% of the Financial
S&P ACTUARIES WORLD Times/S&P Actuaries World Energy Index and 50% of the Financial Times/S&P
(ENERGY 50%/ Actuaries World Basic Industries Index. Both indices are compiled by the
BASIC INDUSTRIES 50%) Financial Times, Goldman Sachs & Co. and Wood Mackenzie & Co., Ltd. in
COMPOSITE INDEX conjunction with the Institute of Actuaries and the Faculty of
Franklin Templeton Actuaries. The index includes electric utilities, waterworks supply and
customizes this Index telephone utilities. The indices are weighted arithmetic averages of the
market prices of the elements that make them up. They also adjust for the
intervening price changes of these elements.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
FINANCIAL TIMES/ This index is compiled by the Financial Times, Goldman Sachs & Co. and Wood
S&P ACTUARIES WORLD Mackenzie & Co., Ltd. in conjunction with the Institute of Actuaries and
UTILITIES INDEX the Faculty of Actuaries. The utilities sector includes electric utilities,
waterworks supply, natural gas utilities and telephone companies. The
indices are weighted arithmetic averages of the market prices of the
elements that make them up. They also adjust for the intervening price
changes of these elements. This is a total return index in $U.S.
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FINANCE The index tracks the emerging stock markets of three world regions based on
CORPORATION'S (IFC) market capitalization weighting. Those regions are Latin America, Asia and
INVESTABLE COMPOSITE INDEX Europe/Mideast/Africa. As of the end of May 1997, the regional weights of
the IFC Composite Index were distributed accordingly: Asia, 40%; Latin
America, 38%; and Europe/Mideast/Africa, 22%.
- ---------------------------------------------------------------------------------------------------------------------------
JP MORGAN GLOBAL GOVERNMENT The index comprises 13 markets, including Australia, Belgium, Canada, Denmark,
BOND INDEX (UNHEDGED) France, Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the U.S.
Each country's weight is determined by the total market capitalization in $U.S.
of all the bonds in that country's traded index. The J.P. Morgan Global
Government Bond Total Return Index includes only actively traded, fixed-rate
bonds with a remaining maturity of one year or longer. The index is unhedged and
expressed in terms of $U.S.
- ---------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS The index includes securities in the Lehman Brothers Government and Corporate
GOVERNMENT/CORPORATE indices. These securities must have at least $100 million par amount
BOND INDEX outstanding and must be rated investment grade (Baa3 or better) by Moody's
Investors Service. If a Moody's rating is not available, the Standard & Poor's
or Fitch rating is used. These must be fixed-rate securities, although they can
carry a coupon that steps up or changes according to a predetermined schedule,
and they must be dollar-denominated and non-convertible.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
LEHMAN BROTHERS This index includes securities issued by the U.S. government or its agencies
INTERMEDIATE GOVERNMENT with maturities from one up to, but not including 10 years. These securities
BOND INDEX must have at least $100 million par amount outstanding and must be rated
investment grade (Baa3 or better) by Moody's Investors Service. If a Moody's
rating is not available, the Standard & Poor's or Fitch rating is used. These
must be fixed-rate securities, although they can carry a coupon that steps up
or changes according to a predetermined schedule, and they must be
dollar-denominated and non-convertible.
- ---------------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH & INCOME This is an equally weighted average calculation of perform-
FUNDS OBJECTIVE AVERAGE ance figures for all funds within the Lipper Growth and Income Funds
Objective Category, which is defined as all mutual funds that combine a
growth of earnings orientation and an income requirement for level and/or
rising dividends. As of 9/23/98, there were 30 funds in this category.
- ---------------------------------------------------------------------------------------------------------------------------
LIPPER INCOME FUNDS This is an equally weighted average calculation of perform-
OBJECTIVE AVERAGE ance figures for all funds within the Lipper Income Funds Objective
Category, which is defined as all mutual funds that normally seek a high
level of current income through investing in income-producing stocks, bonds
and money market instruments. As of 9/23/98, there were 10 funds in this
category.
- ---------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH TREASURY The indices include zero coupon bonds that pay no interest and are issued at a
ZERO COUPON 1-, 5-, 10- discount from redemption price.
20 YEAR BOND
TOTAL RETURN INDICES
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index represents both developed and emerging markets around the world.
INTERNATIONAL (MSCI) "Free" in the title reflects the actual buying opportunities for global
ALL COUNTRIES - investors by taking into account local market restrictions on share
WORLD FREE INDEX ownership by foreigners. The MSCI indices define the local market for each
country by constructing a matrix of all listed securities, sorting the
matrix by industry, and seeking to capture 60% of the market capitalization
for each group by selecting the most investable stocks in each industry.
The index applies full market capitalization weights to each included
stock.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
MORGAN STANLEY CAPITAL The index comprises 48 countries around the world, both
INTERNATIONAL (MSCI) developed and emerging markets, except the U.S. "Free" in
ALL COUNTRIES - WORLD the title reflects the actual buying opportunities for global
EX-U.S. FREE INDEX investors by taking into account local market restrictions on share ownership
by foreigners. The MSCI indices define the local market for each country by
constructing a matrix of all listed securities, sorting the matrix by
industry, and seeking to capture 60% of the market capitalization for each
group by selecting the most investable stocks in each industry. The index
applies full market capitalization weights to each included stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL This is a market capitalization-weighted equity index com-
INTERNATIONAL (MSCI) prising 26 of the 48 countries in the MSCI universe. "Free"
EMERGING MARKETS FREE INDEX denotes investment opportunities in the developing world available to foreign
investors. EMF performance data is calculated in $US and local currency. The
MSCI indices define the local market for each country by constructing a matrix
of all listed securities, sorting the matrix by industry, and seeking to
capture 60% of the market cap for each group by selecting the most investable
stocks in each industry. The index applies full market cap weights to each
included stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index comprises five developed market countries or
INTERNATIONAL (MSCI) regions in the Pacific: Australia, Hong Kong, Japan, New
PACIFIC INDEX Zealand and Singapore. The MSCI indices define the local market for each
country by constructing a matrix of all listed securities, sorting the
matrix by industry, and seeking to capture 60% of the market capitalization
for each group by selecting the most investable stocks in each industry.
The index applies full market capitalization weights to each included
stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index comprises the developed markets of 22 countries
INTERNATIONAL (MSCI) around the world. The MSCI indices define the local market
WORLD INDEX for each country by constructing a matrix of all listed securities, sorting
the matrix by industry, and seeking to capture 60% of the market cap for
each group by selecting the most investable stocks in each industry. The
index applies full market cap weights to each included stock.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
RUSSELL 1000 INDEX Published by Frank Russell Company, the index measures the performance of the
1,000 largest companies in the Russell 3000 Index, representing 89% of the
market capitalization of the Russell 3000. The Russell 3000 contains the 3,000
largest companies incorporated in the U.S. and its territories. As of the
latest reconstitution, the average market capitalization of the companies in
the Russell 1000 was approximately $9.9 billion; the median market
capitalization was approximately $3.7 billion. The smallest company in the
index had an approximate market capitalization of $1,404.7 million.
- ---------------------------------------------------------------------------------------------------------------------------
RUSSELL 2500 INDEX Published by Frank Russell Company, the index measures the performance of the
2,500 smallest companies in the Russell 3000 Index, representing approximately
22% of the total market capitalization of the companies in the Russell 3000.
The Russell 3000 contains the 3,000 largest companies incorporated in the U.S.
and its territories. As of the latest reconstitution, the average market
capitalization of the Russell 2500 was approximately $931 million; the median
market capitalization was approximately $630 million. The largest company in
the index had an approximate market capitalization of $3.7 billion.
- ---------------------------------------------------------------------------------------------------------------------------
SALOMON GLOBAL EX-U.S. This is a total-capitalization weighted index that includes
LESS THAN $1 BILLION INDEX all developed and emerging countries, except the U.S., and includes companies
with a total market capitalization below U.S. $1 billion.
- ---------------------------------------------------------------------------------------------------------------------------
SALOMON WORLD EX-U.S. This is a comprehensive float-weighted equity index consisting of every
EXTENDED MARKET INDEX (EMI) company with an investable market capitalization of over $100 million in
22 countries, except the U.S. The broad market index (BMI) is segregated
into the primary market index (PMI) and extended market index (EMI),
consisting of large and small capitalization issues, respectively.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
STANDARD & POOR'S 500 The S&P 500 consists of 500 widely held domestic common stocks, consisting of
(S&P 500) four broad sectors: industrials, utilities, financials and transportation. It
is a market value-weighted index, where the stock price is multiplied by the
number of shares outstanding, with each stock affecting the index in proportion
to its market value. This index, calculated by Standard & Poor's, is a total
return index with dividends reinvested.
- ---------------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S This is a capitalization-weighted index of all of the stocks in
HEALTH CARE COMPOSITE INDEX the Standard & Poor's 500 that are involved in the business of health care
related products or services. The index was with a base level of 100 as of
January 14, 1987.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE MID CAP COMPANY This index overlaps the top 750 and the next 1,750 of
GROWTH INDEX Wilshire Asset Management's Wilshire 2500 universe (the top 2,500 companies
and 99% of the market capitalization of the Wilshire 5000). Wilshire
includes companies that have market capitalizations ranging from $300
million to $1.3 billion. The portfolio contains from 125-500 securities.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE REAL ESTATE This is a market capitalization-weighted index of publicly
SECURITIES INDEX traded real estate securities, such as real estate investment trusts
(REITs), Real Estate Operating Companies (REOCs) and partnerships. The
index is composed of companies whose charter is the equity ownership and
operation of commercial real estate. The index rebalances monthly and
returns are calculated on a buy-and-hold basis.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE SMALL COMPANY The index is created by screening the bottom 1,750 large
VALUE INDEX companies of Wilshire Asset Management's Wilshire 2500 universe (the top
companies and 99% of the market capitalization of the Wilshire 5000). These
companies have market capitalizations of at least $70 million. Wilshire
excludes companies with high price/earnings ratios, low yields, or high
price/book ratios. The portfolio contains from 125-500 securities.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL GROWTH FUND
1996(4) $10.00 $ .03 $ 1.33 $ 1.36 $ -- $ -- $ -- $11.36 13.60%
1997 11.36 .06 2.02 2.08 (.02) -- (.02) 13.42 18.31
1998 13.42 .10 2.62 2.72 (.06) -- (.06) 16.08 20.29
GLOBAL HEALTH CARE SECURITIES FUND
19986 10.00 .03 .68 .71 -- -- -- 10.71 7.10
GLOBAL UTILITIES SECURITIES FUND
1994 17.14 .95 (2.94) (1.99) (.62) (.11) (.73) 14.42 (11.56)
1995 14.42 .84 3.54 4.38 (.90) -- (.90) 17.90 31.35
1996 17.90 .91 .29 1.20 (.92) -- (.92) 18.18 7.07
1997 18.18 .90 3.54 4.44 (.96) (1.33) (2.29) 20.33 26.76
1998 20.33 .76 1.41 2.17 (.83) (1.22) (2.05) 20.45 11.19
GROWTH AND INCOME FUND
1994 13.99 .19 (.47) (.28) (.09) (.20) (.29) 13.42 (3.41)
1995 13.42 .41 3.92 4.33 (.20) (.41) (.61) 17.14 32.83
1996 17.14 .62 1.64 2.26 (.41) (1.44) (1.85) 17.55 14.19
1997 17.55 .67 4.05 4.72 (.64) (.62) (1.26) 21.01 27.74
1998 21.01 .69 .99 1.68 (.69) (1.64) (2.33) 20.36 8.33
HIGH INCOME FUND
1994 13.13 .88 (1.18) (.30) (.55) (.07) (.62) 12.21 (2.26)
1995 12.21 1.06 1.30 2.36 (.91) -- (.91) 13.66 19.76
1996 13.66 1.20 .56 1.76 (1.20) (.06) (1.26) 14.16 13.90
1997 14.16 1.33 .22 1.55 (1.22) (.04) (1.26) 14.45 11.47
1998 14.45 1.43 (1.25) .18 (1.27) (.08) (1.35) 13.28 .99
INCOME SECURITIES FUND
1994 15.80 .82 (1.80) (.98) (.44) (.07) (.51) 14.31 (6.27)
1995 14.31 1.16 1.96 3.12 (.89) (.07) (.96) 16.47 22.40
1996 16.47 1.32 .44 1.76 (.87) (.15) (1.02) 17.21 11.28
1997 17.21 1.40 1.38 2.78 (1.33) (.29) (1.62) 18.37 17.09
1998 18.37 1.37 (1.07) .30 (1.42) (.33) (1.75) 16.92 1.64
MONEY MARKET FUND
1994 1.00 .04 -- .04 (.04) -- (.04) 1.00 3.82
1995 1.00 .06 -- .06 (.06) -- (.06) 1.00 5.74
1996 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.16
1997 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.24
1998 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.22
MUTUAL DISCOVERY SECURITIES FUND
1996(5) 10.00 .02 .19 .21 -- -- -- 10.21 2.10
1997 10.21 .13 1.84 1.97 (.01) -- (.01) 12.17 19.25
1998 12.17 .20 (.76) (.56) (.17) (.15) (.32) 11.29 (5.00)
MUTUAL SHARES SECURITIES FUND
1996(5) 10.00 .02 .33 .35 -- -- -- 10.35 3.50
1997 10.35 .13 1.71 1.84 (.01) -- (.01) 12.18 17.73
1998 12.18 .28 (.25) .03 (.13) (.12) (.25) 11.96 .09
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- ----------------------------------------------------------------
<S> <C> <C> <C>
$ 44,667 .77%* .96%* 3.91%
109,355 .77 .72 19.90
220,952 .77 1.00 12.17
8,990 .84* .84* 40.80
1,155,110 .52 5.58 11.74
1,423,446 .50 5.14 13.27
1,202,290 .50 4.20 29.69
1,129,904 .50 3.91 17.00
986,755 .50 3.15 33.85
517,877 .54 1.81 99.21
889,487 .52 3.30 116.54
1,077,989 .50 4.06 23.01
1,338,476 .49 3.53 36.71
1,318,743 .49 3.27 27.32
255,036 .60 9.45 22.94
360,904 .56 9.63 20.65
446,096 .54 9.63 27.16
496,036 .53 9.64 36.38
446,609 .53 9.96 41.71
1,000,002 .54 7.27 13.33
1,266,538 .51 8.05 33.14
1,350,659 .50 7.96 15.28
1,406,787 .50 7.53 14.68
1,185,840 .49 6.94 12.22
518,618 .46(7) 4.05 --
429,547 .40(7) 5.58 --
408,930 .43(7) 5.04 --
367,449 .45(7) 5.11 --
414,341 .45(7) 5.08 --
15,418 1.37* 2.11* .14
198,653 1.06 1.19 55.93
224,656 1.00 1.94 93.99
27,677 1.00* 2.56* 1.31
387,787 .80 2.10 49.01
482,444 .77 2.60 70.19
</TABLE>
68
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NATURAL RESOURCES SECURITIES FUND
1994 $14.46 .16 $ (.45) $ (.29) $ (.08) $-- $ (.08) $14.09 (2.01)%
1995 14.09 .22 .12 .34 (.20) (.15) (.35) 14.08 2.35
1996 14.08 .15 .44 .59 (.20) (.18) (.38) 14.29 4.00
1997 14.29 .15 (2.83) (2.68) (.20) -- (.20) 11.41 (18.98)
1998 11.41 .15 (3.02) (2.87) (.15) -- (.15) 8.39 (25.38)
REAL ESTATE SECURITIES FUND
1994 15.04 .38 .06 .44 (.17) -- (.17) 15.31 2.89
1995 15.31 .78 1.83 2.61 (.52) -- (.52) 17.40 17.53
1996 17.40 .79 4.74 5.53 (.78) -- (.78) 22.15 32.82
1997 22.15 .72 3.72 4.44 (.67) (.32) (.99) 25.60 20.70
1998 25.60 1.45 (5.60) (4.15) (.94) (.58) (1.52) 19.93 (16.82)
RISING DIVIDENDS FUND
1994 10.57 .26 (.69) (.43) (.17) -- (.17) 9.97 (4.08)
1995 9.97 .27 2.66 2.93 (.24) -- (.24) 12.66 29.74
1996 12.66 .25 2.77 3.02 (.28) -- (.28) 15.40 24.18
1997 15.40 .22 4.77 4.99 (.26) (.45) (.71) 19.68 33.03
1998 19.68 .23 1.07 1.30 (.22) (2.65) (2.87) 18.11 6.92
SMALL CAP FUND
1995(3) 10.00 .03 .21 .24 -- -- -- 10.24 2.30
1996 10.24 .02 2.95 2.97 (.01) -- (.01) 13.20 28.95
1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05 17.42
1998 15.05 .07 (.20) (.13) (.01) (1.19) (1.20) 13.72 (.98)
TEMPLETON DEVELOPING MARKETS EQUITY FUND
1994(1) 10.00 .07 (.51) (.44) -- -- -- 9.56 (4.40)
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77
1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59 21.59
1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29 (8.72)
1998 10.29 .20 (2.35) (2.15) (.29) (.94) (1.23) 6.91 (21.61)
TEMPLETON GLOBAL ASSET ALLOCATION FUND
1995(2) 10.00 .18 .52 .70 (.18) -- (.18) 10.52 7.01
1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59 19.84
1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72 11.71
1998 13.72 .61 (.59) .02 (.49) (.58) (1.07) 12.67 (.04)
TEMPLETON GLOBAL GROWTH FUND
1994(1) 10.15 .07 .26 .33 -- -- -- 10.48 3.25
1995 10.48 .16 1.17 1.33 (.06) -- (.06) 11.75 12.72
1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80 21.28
1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34 13.50
1998 15.34 .35 .98 1.33 (.41) (1.49) (1.90) 14.77 8.98
TEMPLETON GLOBAL INCOME SECURITIES FUND
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99)
1995 12.19 .29 1.47 1.76 (.49) -- (.49) 13.46 14.68
1996 13.46 1.02 .17 1.19 (1.04) -- (1.04) 13.61 9.56
1997 13.61 1.05 (.73) .32 (.96) -- (.96) 12.97 2.55
1998 12.97 1.07 (.19) .88 (.98) -- (.98) 12.87 7.08
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD O AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- --------------------------------------------------
<S> <C> <C> <C>
$125,078 .68% 1.63% 7.66%
105,109 .66 1.40 15.66
109,579 .65 1.00 21.77
74,924 .69 1.00 85.22
45,927 .64 1.21 64.68
195,697 .62 4.00 11.73
213,473 .59 4.74 22.15
322,721 .57 4.80 10.32
440,554 .54 3.59 11.62
282,290 .54 5.44 13.21
309,929 .80 2.71 24.07
463,253 .78 2.72 18.72
597,424 .76 1.96 27.97
780,298 .74 1.24 37.04
751,869 .72 1.20 26.44
13,301 .90* 2.70* 16.04
170,969 .77 .63 63.72
313,462 .77 .06 64.07
315,460 .77 .51 53.01
98,189 1.53* 1.85* 1.15
158,084 1.41 2.01 19.96
272,098 1.49 1.68 12.42
279,680 1.42 1.57 20.59
162,433 1.41 2.04 36.58
14,729 .90* 3.84* 30.00
56,274 .86 4.21 52.35
93,402 .94 4.22 61.93
81,670 .84 4.32 59.03
158,856 1.14* 2.49* 7.14
338,755 .97 2.46 30.92
579,877 .93 2.20 12.32
758,445 .88 2.49 24.81
747,080 .88 2.27 32.30
254,311 .71 7.99 79.38
243,194 .64 7.59 152.89
221,722 .61 7.30 140.96
185,016 .62 7.03 181.61
150,941 .63 6.86 84.17
</TABLE>
69
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TEMPLETON INTERNATIONAL EQUITY FUND
1994 $12.50 $ .19 $ (.07) $ .12 $ (.04) $ (.07) $ (.11) $12.51 .87%
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59
1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45 22.98
1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12 11.69
1998 16.12 .56 .42 .98 (.53) (1.05) (1.58) 15.52 5.56
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
1996(4) 10.00 .10 1.15 1.25 -- -- -- 11.25 12.50
1997 11.25 .23 (.39) (.16) (.07) -- (.07) 11.02 (1.50)
1998 11.02 .25 (1.52) (1.27) (.25) (.30) (.55) 9.20 (12.27)
TEMPLETON PACIFIC GROWTH FUND
1994 14.61 .22 (1.50) (1.28) (.03) (.06) (.09) 13.24 (8.79)
1995 13.24 .33 .71 1.04 (.26) (.11) (.37) 13.91 7.97
1996 13.91 .21 1.34 1.55 (.44) (.26) (.70) 14.76 11.10
1997 14.76 .29 (5.49) (5.20) (.28) -- (.28) 9.28 (35.95)
1998 9.28 .21 (1.52) (1.31) (.35) (.11) (.46) 7.51 (13.13)
U.S. GOVERNMENT SECURITIES FUND
1994 13.92 .96 (1.59) (.63) (.67) (.05) (.72) 12.57 (4.55)
1995 12.57 .93 1.46 2.39 (.96) -- (.96) 14.00 19.46
1996 14.00 .75 (.31) .44 (.97) -- (.97) 13.47 3.62
1997 13.47 1.00 .21 1.21 (.76) -- (.76) 13.92 9.31
1998 13.92 .99 .01 1.00 (1.03) -- (1.03) 13.89 7.44
VALUE SECURITIES FUND
1998(6) 10.00 .02 (2.23) (2.21) -- -- -- 7.79 (22.10)
ZERO COUPON FUND - 2000
1994 15.44 .68 (1.71) (1.03) (.69) (.10) (.79) 13.62 (6.76)
1995 13.62 .75 2.03 2.78 (.67) -- (.67) 15.73 20.67
1996 15.73 .98 (.65) .33 (.86) (.01) (.87) 15.19 2.43
1997 15.19 1.15 (.12) 1.03 (1.06) (.02) (1.08) 15.14 7.11
1998 15.14 1.22 (.15) 1.07 (1.21) (.19) (1.40) 14.81 7.50
ZERO COUPON FUND - 2005
1994 16.08 .71 (2.24) (1.53) (.60) (.19) (.79) 13.76 (9.60)
1995 13.76 .78 3.53 4.31 (.69) -- (.69) 17.38 31.76
1996 17.38 .96 (1.13) (.17) (.86) -- (.86) 16.35 (.50)
1997 16.35 1.14 .63 1.77 (1.06) (.01) (1.07) 17.05 11.37
1998 17.05 1.01 1.03 2.04 (1.10) (.25) (1.35) 17.74 12.53
ZERO COUPON FUND - 2010
1994 15.68 .55 (2.27) (1.72) (.63) (.31) (.94) 13.02 (10.97)
1995 13.02 .76 4.75 5.51 (.49) -- (.49) 18.04 42.79
1996 18.04 1.02 (1.65) (.63) (.88) (.24) (1.12) 16.29 (2.69)
1997 16.29 1.02 1.54 2.56 (1.01) (.01) (1.02) 17.83 16.57
1998 17.83 1.09 1.39 2.48 (1.11) (.15) (1.26) 19.05 14.45
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- --------------------------------------------------
<S> <C> <C> <C>
$ 785,124 .99% 2.17% 12.22%
850,117 .92 2.87 16.42
1,108,099 .89 3.07 27.52
1,161,430 .89 3.01 26.96
955,900 .88 2.90 5.98
16,255 1.16* 2.51* --
32,201 1.06 2.74 21.38
24,999 1.10 2.26 18.45
375,832 1.07 2.04 4.29
331,936 1.01 2.08 36.06
356,759 .99 1.51 12.85
165,404 1.03 1.97 11.87
98,769 1.10 2.60 12.55
579,039 .53 6.87 18.25**
643,165 .52 6.72 18.68**
843,858 .51 6.66 12.93***
765,084 .50 6.49 16.84
710,832 .50 6.22 31.34
9,013 .83* .95* 22.79
94,230 .407 6.37 --
137,357 .407 6.14 1.63
129,601 .407 6.14 .58
111,650 .407 6.47 6.16
93,543 .407 6.67 17.70
51,499 .407 6.53 2.00
83,222 .407 6.19 1.72
82,603 .407 6.15 2.06
77,296 .407 6.16 4.52
84,487 .407 5.82 3.87
45,361 .407 6.57 4.34
85,633 .407 6.41 31.45
78,816 .407 6.24 16.10
85,515 .407 6.21 12.20
93,515 .407 5.55 15.92
</TABLE>
* Annualized
** The portfolio turnover rate excludes mortgage dollar roll transactions.
** The portfolio turnover rate excludes transactions related to the
liquidation of the Investment Grade Intermediate Bond Fund and the
Adjustable U.S. Government Fund and mortgage dollar roll transactions.
+ Total return is not annualized.
70
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
(1) For the period March 15, 1994 (effective date) to December 31, 1994.
(2) For the period April 19, 1995 (seed date) to December 31, 1995.
(3) For the period November 1, 1995 (effective date) to December 31, 1995.
(4) For the period May 1, 1996 (effective date) to December 31, 1996.
(5) For the period November 8, 1996 (effective date) to December 31, 1996.
(6) For the period May 1, 1998 (effective date) to December 31, 1998.
(7) During the periods indicated below, Franklin Advisers, Inc., the investment
manager, agreed to waive in advance a portion of its management fees
incurred by the Funds in the Trust. Had such action not been taken, the
ratio of expenses to average net assets would have been as follows:
<TABLE>
<CAPTION>
MONEY MARKET FUND ZERO COUPON FUND - 2000 ZERO COUPON FUND - 2005 ZERO COUPON FUND - 2010
<S> <C> <C> <C> <C> <C> <C> <C>
1994 ................. .54% 1994 ................ .66% 1994 ................ .68% 1994 ................. .68%
1995 ................. .53 1995 ................ .63 1995 ................ .66 1995 ................. .66
1996 ................. .53 1996 ................ .62 1996 ................ .65 1996 ................. .65
1997 ................. .53 1997 ................ .63 1997 ................ .65 1997 ................. .65
1998 ................. .53 1998 ................ .66 1998 ................ .66 1998 ................. .66
</TABLE>
See notes to financial statements.
71
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 84.7%
COMMERCIAL SERVICES 2.5%
(a)Concord EFS Inc. 40,000 $ 1,695,000
Equifax Inc. 70,000 2,393,125
(a)Robert Half International Inc. 30,000 1,340,625
----------
5,428,750
----------
CONSUMER DURABLES 2.3%
(a)Electronic Arts Inc. 60,000 3,367,500
Mattel Inc. 70,000 1,596,875
----------
4,964,375
----------
CONSUMER NON-DURABLES 5.4%
Campbell Soup Co. 30,000 1,650,000
The Coca-Cola Co. 7,000 468,125
Hershey Foods Corp. 20,000 1,243,750
Nike Inc., B 35,000 1,419,688
PepsiCo Inc. 30,000 1,228,125
Philip Morris Cos. Inc. 60,000 3,210,000
The Procter & Gamble Co. 30,000 2,739,375
----------
11,959,063
----------
CONSUMER SERVICES 2.9%
(a)Mirage Resorts Inc. 110,000 1,643,125
Time Warner Inc. 64,000 3,972,000
The Walt Disney Co. 27,000 810,000
----------
6,425,125
----------
ELECTRONIC TECHNOLOGY 16.0%
(a)3Com Corp. 55,000 2,464,688
(a)Applied Materials Inc. 35,000 1,494,063
(a)Cisco Systems Inc. 60,750 5,638,359
Compaq Computer Corp. 100,000 4,193,750
Hewlett-Packard Co. 55,000 3,757,188
Intel Corp. 25,000 2,964,063
International Business Machines Corp. 20,000 3,695,000
Linear Technology Corp. 16,000 1,433,000
Molex Inc. 63,437 2,418,536
(a)Uniphase Corp. 35,000 2,428,125
United Technologies Corp. 20,000 2,175,000
(a)Xilinx Inc. 40,000 2,605,000
----------
35,266,772
----------
ENERGY MINERALS 1.9%
(a)Barrett Resources Corp. (Netherlands) 58,200 1,396,800
Royal Dutch Petroleum Co., N.Y. shs., ADR 60,000 2,872,500
----------
4,269,300
----------
FINANCE 5.6%
Associates First Capital Corp., A 70,000 2,966,250
Charles Schwab Corp. 52,500 2,949,843
Fannie Mae 40,000 2,960,000
Providian Financial Corp. 45,000 3,375,000
----------
12,251,093
----------
</TABLE>
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- -----------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH SERVICES 1.2%
<S> <C> <C>
Omnicare Inc. 75,000 $ 2,606,250
-----------
HEALTH TECHNOLOGY 13.3%
Abbott Laboratories 50,000 2,450,000
American Home Products Corp. 60,000 3,378,750
(a)Amgen Inc. 45,000 4,705,312
Baxter International Inc. 50,000 3,215,625
(a)Boston Scientific Corp. 80,000 2,145,000
Bristol-Myers Squibb Co. 35,000 4,683,437
Eli Lilly and Co. 25,000 2,221,875
Johnson & Johnson 35,000 2,935,625
Mentor Corp. 85,000 1,992,187
Merck & Co. Inc. 11,000 1,624,562
-----------
29,352,373
-----------
INDUSTRIAL SERVICES 1.3%
(a)Republic Services Inc., A 60,000 1,106,250
Schlumberger Ltd. 40,000 1,845,000
-----------
2,951,250
-----------
INSURANCE 2.6%
American International Group Inc. 25,000 2,415,625
Citigroup Inc. 50,000 2,475,000
SunAmerica Inc. 10,000 811,250
-----------
5,701,875
-----------
NON-ENERGY MINERALS .7%
De Beers Consolidated Mines AG, ADR (South Africa) 125,000 1,593,750
-----------
PROCESS INDUSTRIES 5.3%
Air Products & Chemicals Inc. 70,000 2,800,000
Millipore Corp. 60,000 1,706,250
(a)Owens-Illinois Inc. 80,000 2,450,000
Pall Corp. 110,000 2,784,375
Sigma-Aldrich Corp. 70,000 2,056,250
-----------
11,796,875
-----------
PRODUCER MANUFACTURING 2.8%
Avery Dennison Corp. 60,000 2,703,750
Emerson Electric Co. 40,000 2,420,000
Minnesota Mining and Manufacturing Co. 15,000 1,066,875
-----------
6,190,625
-----------
RETAIL TRADE 4.4%
Albertson's Inc. 40,000 2,547,500
McDonald's Corp. 40,000 3,065,000
Wal-Mart Stores Inc. 50,000 4,071,875
-----------
9,684,375
-----------
TECHNOLOGY SERVICES 6.3%
Automatic Data Processing Inc. 32,000 2,566,000
(a)Cambridge Technology Partners Inc. 80,000 1,770,000
(a)Computer Sciences Corp. 50,000 3,221,875
(a)Microsoft Corp. 14,000 1,941,625
(a)Oracle Corp. 35,000 1,509,375
(a)Synopsys Inc. 55,000 2,983,750
-----------
13,992,625
-----------
</TABLE>
73
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 2.8%
(a)AirTouch Communications Inc. ............................................... 60,000 $ 4,327,500
GTE Corp. .................................................................... 30,000 1,950,000
-----------
6,277,500
-----------
TRANSPORTATION 3.3%
Air Express International Corp. .............................................. 150,000 3,262,500
Expeditors International of Washington Inc. .................................. 60,000 2,520,000
Southwest Airlines Co. ....................................................... 70,000 1,570,625
-----------
7,353,125
-----------
UTILITIES 4.1%
(a)AES Corp.................................................................... 65,000 3,079,375
CMS Energy Corp. .............................................................. 60,000 2,906,250
Enron Corp. .................................................................. 40,000 2,282,500
MCN Energy Group Inc. ........................................................ 40,000 762,500
-----------
9,030,625
-----------
TOTAL LONG TERM INVESTMENTS (COST $142,185,516) .............................. 187,095,726
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
(f) REPURCHASE AGREEMENT 15.1%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $33,481,709) (COST $33,464,304) $33,464,304 33,464,304
Barclays Capital Inc. (Maturity Value $1,700,279)
Bear, Stearns & Co. Inc. (Maturity Value $440,814)
Chase Securities Inc. (Maturity Value $3,463,532)
CIBC Oppenheimer Corp. (Maturity Value $3,463,532)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $3,463,532)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $3,463,532)
Goldman, Sachs & Co. (Maturity Value $944,600)
Greenwich Capital Markets Inc. (Maturity Value $3,463,532)
Lehman Brothers Inc. (Maturity Value $629,732)
NationsBanc Montgomery Securities LLC (Maturity Value $3,463,532)
Paine Webber Inc. (Maturity Value $1,889,200)
Paribas Corp. (Maturity Value $3,463,532)
Warburg Dillon Read LLC (Maturity Value $3,632,360)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $175,649,820) 99.8% ................................................ 220,560,030
OTHER ASSETS, LESS LIABILITIES .2% ......................................................... 391,608
------------
NET ASSETS 100.0% .......................................................................... $220,951,638
============
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
74
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL HEALTH CARE SECURITIES FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 82.6%
HEALTH SERVICES 36.0%
(a)American Dental Partners Inc. ............................................................ 15,200 $ 175,750
Cardinal Health Inc. ....................................................................... 2,950 223,831
(a)Curative Health Services Inc. ............................................................ 8,500 284,750
HBO & Co. .................................................................................. 8,055 231,078
(a)Healthcare Recoveries Inc. ............................................................... 11,500 195,500
(a)New American Healthcare Corp. ............................................................ 24,000 268,500
Omnicare Inc. .............................................................................. 10,800 375,300
(a)PAREXEL International Corp. .............................................................. 10,700 267,500
(a)Pediatrix Medical Group Inc. ............................................................. 3,400 203,788
(a)Pharmaceutical Product Development Inc. .................................................. 9,000 270,562
(a)Renal Care Group Inc. .................................................................... 10,000 288,125
(a)Tenet Healthcare Corp. ................................................................... 6,900 181,125
(a)Total Renal Care Holdings Inc. ........................................................... 2,200 65,038
(a)Transitions Systems Inc. ................................................................. 14,000 210,000
---------
3,240,847
---------
HEALTH TECHNOLOGY 46.6%
American Home Products Corp. ............................................................... 6,800 382,925
(a)Amgen Inc. ............................................................................... 1,700 177,756
Baxter International Inc. .................................................................. 4,800 308,700
Bristol-Myers Squibb Co. ................................................................... 4,000 535,250
(a)ESC Medical Systems Ltd. (Israel) ........................................................ 9,500 99,750
(a)Genentech Inc. ........................................................................... 2,200 175,313
(a)Inhale Therapeutic Systems Inc. .......................................................... 9,300 306,900
(a)Ligand Pharmaceuticals Inc., B ........................................................... 11,000 127,875
Medtronic Inc. ............................................................................. 2,200 163,350
(a)Molecular Devices Corp. .................................................................. 8,400 182,700
(a)OrthoLogic Corp. ......................................................................... 46,000 153,815
Pfizer Inc. ................................................................................ 3,500 439,030
Pharmacia & Upjohn Inc. .................................................................... 3,000 169,875
Schering-Plough Corp. ...................................................................... 3,000 165,750
(a)Serologicals Corp. ....................................................................... 13,800 414,000
SmithKline Beecham PLC, ADR (United Kingdom) ............................................... 3,000 208,500
(a)Zonagen Inc. ............................................................................. 9,100 174,038
---------
4,185,527
---------
TOTAL LONG TERM INVESTMENTS (COST $6,550,381) .............................................. 7,426,374
---------
</TABLE>
75
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GLOBAL HEALTH CARE SECURITIES FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 19.7%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $1,770,149) (COST $1,769,229) ... $1,769,229 $ 1,769,229
Barclays Capital Inc. (Maturity Value $89,892)
Bear, Stearns & Co. Inc. (Maturity Value $23,305)
Chase Securities Inc. (Maturity Value $183,114)
CIBC Oppenheimer Corp. (Maturity Value $183,114)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $183,114)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $183,114)
Goldman, Sachs & Co. (Maturity Value $49,940)
Greenwich Capital Markets Inc. (Maturity Value $183,114)
Lehman Brothers Inc. (Maturity Value $33,293)
NationsBanc Montgomery Securities LLC (Maturity Value $183,114)
Paine Webber Inc. (Maturity Value $99,880)
Paribas Corp. (Maturity Value $183,114)
Warburg Dillon Read LLC (Maturity Value $192,041)
Collateralized by U.S. Treasury Bills & Notes
----------
TOTAL INVESTMENTS (COST $8,319,610) 102.3% .................................................. 9,195,603
OTHER ASSETS, LESS LIABILITIES (2.3%) ....................................................... (205,278)
----------
NET ASSETS 100.0% ........................................................................... $8,990,325
==========
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
76
See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 92.4%
(a)Advanced Fibre Communications Inc. ..................................... United States 600,000 $ 6,562,500
(a)AEM SpA ................................................................ Italy 4,745,000 11,300,346
(a)AES Corp. .............................................................. United States 550,000 26,056,250
AGL Resources Inc. ....................................................... United States 143,500 3,309,469
(a)AirTouch Communications Inc. ........................................... United States 246,100 17,749,963
American Electric Power Co. Inc. ......................................... United States 200,000 9,412,500
Beijing Datang Power Generation Co. Ltd. ................................. China 3,291,000 987,650
Bell Atlantic Corp. ...................................................... United States 350,000 18,550,000
BSES Ltd., GDR, 144A ..................................................... India 158,600 2,022,150
Central & South West Corp. ............................................... United States 647,400 17,763,038
Cinergy Corp. ............................................................ United States 829,800 28,524,375
CMS Energy Corp. ......................................................... United States 325,000 15,742,188
Coastal Corp. ............................................................ United States 280,000 9,782,500
Companhia Paranaense de Energia-Copel, ADR ............................... Brazil 83,300 593,513
Duke Energy Corp. ........................................................ United States 310,000 19,859,375
Edison International ..................................................... United States 838,600 23,375,975
Electricidade de Portugal SA ............................................. Portugal 324,000 7,133,498
Endesa SA ................................................................ Spain 718,400 19,063,295
Enron Corp. .............................................................. United States 450,000 25,678,125
Entergy Corp. ............................................................ United States 846,200 26,337,975
(a)Equant NV, N.Y. shs .................................................... Netherlands 305,700 20,730,281
Espoon Sahko Oyj, 144A, ADS .............................................. Finland 195,000 4,659,915
Florida Progress Corp. ................................................... United States 647,700 29,025,057
(a)Fortum Corp. ........................................................... Finland 939,300 5,843,494
FPL Group Inc. ........................................................... United States 445,800 27,472,425
(a)Global TeleSystems Group Inc. .......................................... United States 306,400 17,081,800
GPU Inc. ................................................................. United States 750,000 33,140,625
(a)Grupo Iusacell SA, D ................................................... Mexico 55,600 35,097
(a)Grupo Iusacell SA, L, ADR .............................................. Mexico 105,140 749,123
GTE Corp. ................................................................ United States 150,000 9,750,000
Hellenic Telecommunications Organization SA .............................. Greece 432,111 11,495,186
Hongkong Electric Holdings Ltd. .......................................... Hong Kong 1,250,000 3,791,668
(a)ICG Communications Inc. ................................................ United States 1,060,000 22,790,000
(a)Intermedia Communications Inc. ......................................... United States 316,600 5,461,350
(a)Korea Telecom Corp. .................................................... South Korea 200 6,320
(a)MCI WorldCom Inc. ...................................................... United States 150,000 10,762,500
MDU Resources Group Inc. ................................................. United States 616,800 16,229,550
(a)Millicom International Cellular SA ..................................... Luxembourg 140,000 4,882,500
Montana Power Co. ........................................................ United States 297,100 16,804,719
New Century Energies Inc. ................................................ United States 610,065 29,740,669
New Jersey Resources Corp. ............................................... United States 210,000 8,295,000
(a)Nextel Communications Inc. ............................................. United States 465,000 10,985,625
Nippon Telegraph & Telephone Corp. ....................................... Japan 1,180 9,121,986
NIPSCO Industries Inc. ................................................... United States 504,800 15,364,850
Northern States Power Co. ................................................ United States 423,600 11,754,900
Northwestern Corp. ....................................................... United States 363,000 9,596,813
PacifiCorp ............................................................... United States 411,000 8,656,688
(a)Panafon Hellenic Telecom SA ............................................ Greece 41,000 1,098,018
PG&E Corp. ............................................................... United States 855,150 26,937,225
Pinnacle West Capital Corp. .............................................. United States 663,000 28,094,625
Portugal Telecom SA ...................................................... Portugal 239,400 10,976,406
(a)Primus Telecommunications Group Inc. ................................... United States 226,500 3,737,250
SBC Communications Inc. .................................................. United States 150,000 8,043,750
SCANA Corp. .............................................................. United States 400,000 12,900,000
Sempra Energy ............................................................ United States 780,000 19,792,500
(a)Sonera Group Oyi ....................................................... Finland 163,800 2,943,832
Southern Co. ............................................................. United States 1,198,290 34,825,303
(a)Sprint Corp. ........................................................... United States 300,000 6,937,500
</TABLE>
77
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND COUNTRY SHARES VALUE
COMMON STOCKS (CONT.) ------------ -------- ------------
<S> <C> <C> <C>
(a)Swisscom AG ............................................................ Switzerland 47,700 $ 19,969,057
TECO Energy Inc. ......................................................... United States 600,000 16,912,500
Telecom Italia SpA ....................................................... Italy 5,028,372 31,601,488
Telefonica SA, ADR ....................................................... Spain 88,351 11,960,568
(a)TeleWest Communications PLC, ADR ....................................... United Kingdom 62,633 1,769,382
Tokyo Electric Power Co. ................................................. Japan 135,000 3,339,096
Transportadora de Gas del Sur SA, ADR .................................... Argentina 370,000 3,746,250
VEBA AG .................................................................. Germany 267,500 15,851,495
Viag AG .................................................................. Germany 6,200 3,666,547
Washington Gas Light Co. ................................................. United States 287,500 7,798,438
Washington Water Power Co. ............................................... United States 224,000 4,312,000
Western Resources Inc. ................................................... United States 8,700 289,271
------------
TOTAL COMMON STOCKS (COST $714,629,056) .................................. 911,535,327
------------
CONVERTIBLE PREFERRED STOCKS 3.5%
(c)CMS Energy Corp., 7.75%, cvt. pfd ...................................... United States 175,000 10,325,000
Nortel Inversora SA, 10.00%, cvt. pfd .................................... Argentina 320,000 16,640,000
Texas Utilities Co., 9.25%, cvt. pfd ..................................... United States 136,600 7,700,825
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,864,125) .................... 34,665,825
------------
TOTAL LONG TERM INVESTMENTS (COST $748,493,181) 95.9% .................... 946,201,152
------------
PRINCIPAL
AMOUNT
---------
(g)REPURCHASE AGREEMENT 2.9%
NationsBanc Montgomery Securities LLC, 4.00%, 1/04/99
(Maturity Value $29,062,911) (COST $29,050,000) .................... United States $29,050,000 29,050,000
Collateralized by U.S. Treasury Notes ------------
TOTAL INVESTMENTS (COST $777,543,181) 98.8% ............................ 975,251,152
OTHER ASSETS, LESS LIABILITIES 1.2% .................................... 11,504,044
------------
NET ASSETS 100.0% ...................................................... $986,755,196
============
</TABLE>
(a) Non-income producing.
(c) See Note 8 regarding restricted securities.
(g) See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
78
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 93.7%
COMMERCIAL SERVICES .8%
The Dun & Bradstreet Corp. ................................ United States 335,200 $ 10,579,750
------------
CONSUMER DURABLES 4.7%
Eastman Kodak Co. ......................................... United States 262,000 18,864,000
Ford Motor Co. ............................................ United States 372,500 21,861,094
General Motors Corp. ...................................... United States 288,000 20,610,000
------------
61,335,094
------------
CONSUMER NON-DURABLES 10.2%
Anheuser-Busch Cos. Inc. .................................. United States 330,000 21,656,250
DIMON Inc. ................................................ United States 949,800 7,064,138
Fortune Brands Inc. ....................................... United States 405,100 12,811,288
General Mills Inc. ........................................ United States 263,500 20,487,125
H.J. Heinz Co. ............................................ United States 283,000 16,024,875
Philip Morris Cos. Inc. ................................... United States 437,800 23,422,300
RJR Nabisco Holdings Corp. ................................ United States 248,560 7,379,125
UST Inc. .................................................. United States 745,000 25,981,875
------------
134,826,976
------------
ELECTRONIC TECHNOLOGY .6%
AMP Inc. .................................................. United States 139,560 7,265,843
EG&G Inc. ................................................. United States 15,000 417,188
------------
7,683,031
------------
ENERGY MINERALS 11.6%
Amoco Corp. ............................................... United States 136,400 8,235,150
Atlantic Richfield Co. .................................... United States 520,000 33,930,000
Chevron Corp. ............................................. United States 309,000 25,627,681
Exxon Corp. ............................................... United States 167,000 12,211,875
Mobil Corp. ............................................... United States 154,000 13,417,250
Texaco Inc. ............................................... United States 486,400 25,718,400
Ultramar Diamond Shamrock Corp. ........................... United States 447,800 10,859,150
YPF SA, ADR ............................................... Argentina 802,000 22,405,875
------------
152,405,381
------------
FINANCE 8.1%
Bank One Corp. ............................................ United States 276,210 14,103,973
BankBoston Corp. .......................................... United States 367,000 14,290,063
Household International Inc. .............................. United States 100,000 3,962,500
J.P. Morgan & Co. Inc. .................................... United States 120,900 12,702,056
Mercantile Bancorporation Inc. ............................ United States 266,703 12,301,676
National City Corp. ....................................... United States 275,000 19,937,500
PNC Bank Corp. ............................................ United States 322,900 17,476,963
Westpac Banking Corp. Ltd. ................................ Australia 1,763,651 11,812,553
------------
106,587,284
------------
HEALTH TECHNOLOGY 4.3%
Glaxo Wellcome PLC, ADR ................................... United Kingdom 320,800 22,295,600
Pharmacia & Upjohn Inc. ................................... United States 615,000 34,824,375
------------
57,119,975
------------
INDUSTRIAL SERVICES .5%
(h)Browning-Ferris Industries Inc........................... United States 225,000 6,398,438
------------
INSURANCE 6.7%
Exel Ltd. ................................................. Bermuda 249,348 18,701,100
Lincoln National Corp. .................................... United States 250,400 20,485,850
Safeco Corp. .............................................. United States 422,300 18,132,506
Scor ...................................................... France 197,000 13,030,593
St. Paul Cos. Inc. ........................................ United States 472,000 16,402,000
Zenith National Insurance Corp. ........................... United States 101,200 2,340,250
------------
89,092,299
------------
</TABLE>
79
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (Cont.)
NON-ENERGY MINERALS 3.5%
British Steel PLC, ADR .................................... United Kingdom 490,000 $ 7,166,250
Carpenter Technology Corp. ................................ United States 126,300 4,286,306
De Beers Consolidated Mines AG, ADR ....................... South Africa 753,000 9,600,750
Georgia Pacific Corp. (Timber Group) ...................... United States 341,700 8,136,731
Weyerhaeuser Co. .......................................... United States 325,000 16,514,063
-----------
45,704,100
-----------
PROCESS INDUSTRIES 5.9%
Dow Chemical Co. .......................................... United States 164,300 14,941,031
Imperial Chemical Industries PLC, ADR ..................... United Kingdom 474,400 16,574,350
Pall Corp. ................................................ United States 754,600 19,100,813
Potlatch Corp. ............................................ United States 277,400 10,229,125
Union Camp Corp. .......................................... United States 250,000 16,875,000
-----------
77,720,319
-----------
PRODUCER MANUFACTURING 6.1%
Avery Dennison Corp. ...................................... United States 204,500 9,215,281
Cooper Industries Inc. .................................... United States 192,300 9,170,306
Dana Corp. ................................................ United States 66,600 2,722,275
Diebold Inc. .............................................. United States 379,500 13,543,406
Federal Signal Corp. ...................................... United States 655,000 17,930,625
General Electric Co. ...................................... United States 92,200 9,410,163
Minnesota Mining & Manufacturing Co. ...................... United States 150,500 10,704,313
Pitney Bowes Inc. ......................................... United States 125,000 8,257,813
-----------
80,954,182
-----------
REAL ESTATE 5.7%
Arden Realty Inc. ......................................... United States 639,200 14,821,450
Equity Residential Properties Trust ....................... United States 465,300 18,815,569
FelCor Lodging Trust Inc. ................................. United States 693,100 15,984,619
Glenborough Realty Trust Inc. ............................. United States 350,000 7,131,250
Simon Property Group Inc. ................................. United States 652,700 18,601,950
-----------
75,354,838
-----------
RETAIL TRADE 2.2%
J.C. Penney Co. Inc. ...................................... United States 616,900 28,917,188
-----------
TELECOMMUNICATIONS 7.7%
Ameritech Corp. ........................................... United States 292,000 18,505,500
Bell Atlantic Corp. ....................................... United States 739,632 39,200,496
GTE Corp. ................................................. United States 374,500 24,342,500
U.S. West Inc. ............................................ United States 308,100 19,910,963
-----------
101,959,459
-----------
UTILITIES 15.1%
(h)Baltimore Gas & Electric Co. ............................ United States 306,000 9,447,750
Cinergy Corp. ............................................. United States 539,000 18,528,125
Consolidated Natural Gas Co. .............................. United States 317,000 17,118,000
Dominion Resources Inc. ................................... United States 521,000 24,356,750
GPU Inc. .................................................. United States 425,300 18,792,944
MCN Energy Group Inc. ..................................... United States 740,000 14,106,250
National Fuel Gas Co. ..................................... United States 365,800 16,529,588
New Century Energies Inc. ................................. United States 333,000 16,233,750
OGE Energy Corp. .......................................... United States 588,000 17,052,000
PacifiCorp ................................................ United States 603,000 12,700,688
PG&E Corp. ................................................ United States 395,700 12,464,550
Sempra Energy ............................................. United States 877,685 22,271,257
-----------
199,601,652
-----------
</TABLE>
80
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GROWTH AND INCOME FUND COUNTRY AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES 1.9%
<S> <C> <C> <C>
Freddie Mac, notes, 0.00%, 6/04/99 (COST $24,488,806) ........................ United States $25,000,000 $ 24,489,325
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,015,815,938) ............................ 1,260,729,291
--------------
(f)REPURCHASE AGREEMENT 4.4%
Joint Repurchase Agreement, 4.681%, 1/04/99
(Maturity Value $58,486,106) (COST $58,455,701) ............................ United States 58,455,701 58,455,701
Barclays Capital Inc. (Maturity Value $2,970,060)
Bear Stearns & Co. Inc. (Maturity Value $770,015)
Chase Securities Inc. (Maturity Value $6,050,125)
CIBC Oppenheimer Corp. (Maturity Value $6,050,125)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $6,050,125)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $6,050,125)
Goldman, Sachs & Co. (Maturity Value $1,650,033)
Greenwich Capital Markets Inc. (Maturity Value $6,050,125)
Lehman Brothers Inc. (Maturity Value $1,100,022)
NationsBanc Montgomery Securities LLC (Maturity Value $6,050,125)
Paine Webber Inc. (Maturity Value $3,300,068)
Paribas Corp. (Maturity Value $6,050,125)
Warburg Dillon Read LLC (Maturity Value $6,345,033)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL SHORT TERM INVESTMENTS (COST $82,944,507) .............................. 82,945,026
--------------
TOTAL INVESTMENTS (COST $1,074,271,639) 100.0% ............................... 1,319,184,992
OTHER ASSETS, LESS LIABILITIES ............................................... (441,719)
--------------
NET ASSETS 100.0% ............................................................ $1,318,743,273
--------------
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
(h) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
81
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
HIGH INCOME FUND COUNTRY WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) COMMON STOCKS AND WARRANTS
CONSUMER SERVICES
Foodmaker Inc. ............................................................... United States 210 $ 4,633
Wireless One Inc., wts., 8/01/01 ............................................. United States 5,000 --
-----------
4,633
-----------
NON-ENERGY MINERALS
Gulf States Steel, wts., 4/15/03 ............................................. United States 5,000 5,000
-----------
TELECOMMUNICATIONS
International Wireless Communications, wts., 8/15/01 ......................... United States 7,800 39
Nextel Communications Inc., wts., 4/25/99 .................................... United States 6,500 65
Poland Telecom Finance, 144A, wts., 12/01/07 ................................. Poland 8,000 32,000
-----------
32,104
-----------
UTILITIES
Empire Gas Corp., wts., 7/15/04 .............................................. United States 6,900 34,500
Loral Orion Network System, wts., 1/15/07 .................................... United States 1,500 12,671
Nextel International Inc., wts., 4/15/07 ..................................... United States 7,000 35,000
-----------
82,171
-----------
TOTAL COMMON STOCKS AND WARRANTS (COST $237,249) ............................. 123,908
-----------
PREFERRED STOCKS .3%
Fresenius Medical Care AG, 9.00%, pfd. (COST $1,300,000) ..................... Germany 1,300 1,352,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-------
<S> <C> <C> <C>
BONDS 93.4%
COMMERCIAL SERVICES 3.6%
Borg-Warner Security Corp., senior sub. note, 9.625%, 3/15/07 ................ United States $ 4,000,000 4,340,000
Fleming Cos. Inc., senior sub. note, B, 10.50%, 12/01/04 ..................... United States 2,000,000 1,900,000
Fleming Cos. Inc., senior sub. note, B, 10.625%, 7/31/07 ..................... United States 2,000,000 1,875,000
Intertek Finance PLC, senior sub. note, B, 10.25%, 11/01/06 .................. United Kingdom 3,700,000 3,348,500
Outdoor Systems Inc., senior sub. note, 8.875%, 6/15/07 ...................... United States 4,250,000 4,568,750
-----------
16,032,250
-----------
CONSUMER DURABLES 2.6%
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ................... United States 3,000,000 1,515,000
Pillowtex Corp., senior sub. note, B, 9.00%, 12/15/07 ........................ United States 2,900,000 3,001,500
Sealy Mattress Co., senior disc. note, B, zero cpn. to 12/15/02,
10.875% thereafter, 12/15/07 ............................................. United States 1,500,000 900,000
Sealy Mattress Co., senior sub. note, B, 9.875%, 12/15/07 .................... United States 1,000,000 965,000
True Temper Sports Inc., senior sub. note, 144A, 10.875%, 12/01/08 ........... United States 4,000,000 3,980,000
Windmere-Durable Holdings Inc., senior sub. note, 10.00%, 7/31/08 ............ United States 1,200,000 1,128,000
-----------
11,489,500
-----------
CONSUMER NON-DURABLES 3.9%
Compania Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 .............. Argentina 1,250,000 956,250
Doane Pet Care Co., senior sub. note, 144A, 9.75%, 5/15/07 ................... United States 2,197,000 2,257,418
International Home Foods, senior sub. note, 10.375%, 11/01/06 ................ United States 1,600,000 1,740,000
Packaged Ice Inc., senior sub. note, B, 9.75%, 2/01/05 ....................... United States 2,600,000 2,665,000
RC/Arbys Corp., senior secured note, 9.75%, 8/01/00 .......................... United States 4,000,000 3,940,000
RJR Nabisco Inc., senior note, 9.25%, 8/15/13 ................................ United States 3,000,000 3,080,022
Styling Technology Corp., senior sub. note, 10.875%, 7/01/08 ................. United States 3,000,000 2,865,000
-----------
17,503,690
-----------
CONSUMER SERVICES 25.6%
Advanstar Communications, senior sub. note, 9.25%, 5/01/08 ................... United States 5,000,000 5,050,000
Ascent Entertainment Group Inc., senior disc. note, zero cpn. to
12/15/02, 11.875% thereafter, 12/15/04 .................................... United States 3,000,000 1,815,000
Benedek Broadcasting, senior note, 11.875%, 3/01/05 .......................... United States 2,500,000 2,675,000
Century Communications Corp., senior sub. note, 9.50%, 3/01/05 ............... United States 3,000,000 3,345,000
Chancellor Media Corp., senior note, 144A, 8.00%, 11/01/08 ................... United States 3,500,000 3,578,750
</TABLE>
82
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CONSUMER SERVICES (CONT.)
Chancellor Media Corp., senior sub. note, 144A, 9.00%, 10/01/08 ........ United States $ 4,500,000 $ 4,736,250
Circus Circus Enterprises Inc., senior sub. note, 9.25%, 12/01/05 ...... United States 1,000,000 1,015,000
CSC Holdings Inc., B, 8.125%, 8/15/09 .................................. United States 1,500,000 1,585,200
CSC Holdings Inc., senior sub. deb., 10.50%, 5/15/16 ................... United States 3,000,000 3,540,000
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ................... United States 4,500,000 5,028,750
Diamond Cable Communication Co. PLC, senior disc. note, zero cpn to
12/15/00, 11.75% thereafter, 12/15/05 .............................. United Kingdom 2,700,000 2,247,750
Diamond Cable Communication Co. PLC, senior disc. note, zero cpn to
2/15/02, 10.75% thereafter, 2/15/07.................................. United Kingdom 1,500,000 1,057,500
Diamond Holdings PLC, 9.125%, 2/01/08 .................................. United Kingdom 3,000,000 2,880,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ................ United States 1,000,000 1,045,000
Fox Family Worldwide Inc., senior disc. note, zero cpn to 11/01/02,
10.25% thereafter, 11/01/07 ......................................... United States 1,000,000 630,000
Fox Family Worldwide Inc., senior note, 9.25%, 11/01/07 ................ United States 1,500,000 1,492,500
Friendly Ice Cream Corp., senior note, 10.50%, 12/01/07 ................ United States 8,000,000 8,140,000
Granite Broadcasting Corp., senior sub. note, A, 10.375%, 5/15/05 ...... United States 6,500,000 6,597,500
Hammons (John Q) Hotels, first mortgage, 8.875%, 2/15/04 ............... United States 1,000,000 925,000
Hammons (John Q) Hotels, first mortgage, 9.75%, 10/01/05 ............... United States 1,500,000 1,410,000
Hard Rock Hotel Inc., senior sub. note, B, 9.25%, 4/01/05 .............. United States 400,000 402,000
Harrah's Operating Co. Inc., senior sub. note, 7.875%, 12/15/05 ........ United States 4,500,000 4,488,750
Hollinger International Publishing, senior sub. note, 9.25%, 3/15/07 ... United States 4,500,000 4,770,000
La Petite Academy Inc., senior note, B, 10.00%, 5/15/08 ................ United States 5,000,000 4,975,000
Lin Holdings Corp., senior disc. note, zero cpn. to 3/01/03,
10.00% thereafter, 3/01/08 ......................................... United States 2,600,000 1,833,000
Lin Television Corp., senior sub. note, 8.375%, 3/01/08 ................ United States 2,800,000 2,814,000
Prime Hospitality Corp., senior sub. note, B, 9.75%, 4/01/07 ........... United States 3,000,000 3,075,000
Protection One Alarm, Monitoring Inc., senior sub. note, 144A,
8.125%, 1/15/09 ................................................ United States 5,000,000 5,000,000
Red Roof Inns Inc., senior note, 9.625%, 12/15/03 ...................... United States 2,310,000 2,367,750
Regal Cinemas Inc., senior sub. note, 9.50%, 6/01/08 ................... United States 5,000,000 5,225,000
Rio Hotel & Casino Inc., senior sub. note, 10.625%, 7/15/05 ............ United States 3,000,000 3,285,000
Rogers Cablesystems Inc., senior disc. deb., 9.65%, 1/15/14 ............ Canada 5,700,000 CAD 3,949,551
SFX Broadcasting Inc., senior sub. note, B, 10.75%, 5/15/06 ............ United States 1,304,000 1,434,400
Sinclair Broadcast Group Inc., senior sub. note, 10.00%, 9/30/05 ....... United States 2,500,000 2,662,500
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ............ United States 2,250,000 2,317,500
TeleWest Communications PLC, senior disc. deb., zero cpn to
10/01/00, 11.00% thereafter, 10/01/07 .............................. United Kingdom 8,000,000 6,720,000
Wireless One Inc., senior disc. note, zero cpn. to 8/01/01,
13.50% thereafter, 8/01/06 .......................................... United States 2,000,000 60,000
-----------
114,173,651
-----------
ELECTRONIC TECHNOLOGY 2.6%
Amphenol Corp., senior sub. note, 9.875%, 5/15/07 ...................... United States 1,000,000 1,025,000
Exide Electronics Group Inc., senior sub. note, B, 11.50%, 3/15/06 ..... United States 2,000,000 2,340,000
L-3 Communications Corp., senior sub. note, 10.375%, 5/01/07 ........... United States 3,500,000 3,858,750
L-3 Communications Corp., senior sub. note, 144A, 8.00%, 8/01/08 ....... United States 750,000 759,375
Telecommunication Techniques Co., senior sub. note, 9.75%, 5/15/08 ..... United States 3,500,000 3,465,000
-----------
11,448,125
-----------
ENERGY MINERALS 3.9%
Abraxas Petroleum Corp., senior note, D, 11.50%, 11/01/04 .............. United States 4,300,000 3,268,000
Clark R&M Inc., senior sub. note, 8.875%, 11/15/07 ..................... United States 5,000,000 4,475,000
Forcenergy Inc., senior sub. note, 9.50%, 11/01/06 ..................... United States 800,000 620,000
Mesa Operating Co., zero cpn. to 7/01/01, 11.625% thereafter, 7/01/06 .. United States 1,800,000 1,381,500
Nuevo Energy Co., senior sub. note, B, 8.875%, 6/01/08 ................. United States 1,300,000 1,267,500
P&L Coal Holdings Corp., senior note, B, 8.875%, 5/15/08 ............... United States 1,000,000 1,025,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 .......... United States 4,500,000 4,567,500
Pogo Producing Co., senior sub. note, B, 8.75%, 5/15/07 ................ United States 1,000,000 955,000
-----------
17,559,500
-----------
HEALTH SERVICES 4.6%
Abbey Healthcare Group, senior sub. note, 9.50%, 11/01/02 .............. United States 7,770,000 7,692,300
Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 ........ United States 2,750,000 2,433,750
</TABLE>
83
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
HEALTH SERVICES (CONT.)
Pharmerica Inc., senior sub. note, 8.375%, 4/01/08 ...................... United States $ 1,250,000 $ 1,125,000
Tenet Healthcare Corp., senior note, 8.625%, 12/01/03 ................... United States 2,400,000 2,534,882
Tenet Healthcare Corp., senior sub. note, 8.625%, 1/15/07 ............... United States 3,250,000 3,412,500
Vencor Operation Inc., senior sub. note, 9.875%, 5/01/05 ................ United States 4,200,000 3,465,000
----------
20,663,432
----------
INDUSTRIAL SERVICES 3.0%
Allied Waste North America Inc., senior note, 144A, 7.875%, 1/01/09 ..... United States 5,500,000 5,568,750
Dailey International Inc., senior note, B, 9.50%, 2/15/08 ............... United States 1,550,000 689,750
Safety Kleen Services, 9.25%, 6/01/08 ................................... United States 4,500,000 4,657,500
Universal Compression Inc., senior disc. note, zero cpn. to
2/15/03, 9.875% thereafter, 2/15/08 .................................. United States 4,650,000 2,673,750
----------
13,589,750
----------
NON-ENERGY MINERALS 2.0%
Algoma Steel Inc., first mortgage, 12.375%, 7/15/05 ..................... Canada 4,000,000 3,060,000
Bear Island Paper Company LLC, senior note, B, 10.00%, 12/01/07 ......... United States 1,800,000 1,809,000
LTV Corp., senior note, 8.20%, 9/15/07 .................................. United States 4,500,000 4,095,000
----------
8,964,000
----------
PROCESS INDUSTRIES 7.7%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 ........... United States 3,750,000 3,928,125
Asia Pulp & Paper Co. Ltd., 12.00%, 2/15/04 ............................. Indonesia 4,500,000 2,610,000
Climachen Inc., senior sub. note, B, 10.75%, 12/01/07 ................... United States 1,200,000 1,212,000
Container Corp., senior note, A, 11.25%, 5/01/04 ........................ United States 2,500,000 2,612,500
Four M Corp., senior note, B, 12.00%, 6/01/06 ........................... United States 7,700,000 5,890,500
Graham Packaging Holdings, senior disc. note, B, zero cpn. to
1/15/03, 10.75% thereafter, 1/15/09 .................................. United States 900,000 616,500
Huntsman Corp., senior sub. note, 144A, 9.50%, 7/01/07 .................. United States 1,000,000 997,500
Huntsman Corp., senior sub. note, 144A, 9.50%, 7/01/07 .................. United States 3,500,000 3,500,000
Plastic Containers Inc., senior note, B, 10.00%, 12/15/06 ............... United States 1,000,000 1,045,000
(b)Polysindo International Finance Co. BV, 9.375%, 7/30/07 ................ Indonesia 4,250,000 1,243,125
Purina Mills Inc., senior sub. note, 9.00%, 3/15/10 ..................... United States 2,600,000 2,665,000
Radnor Holdings Inc., senior note, 10.00%, 12/01/03 ..................... United States 5,000,000 5,050,000
Repap New Brunswick, senior note, 9.00%, 6/01/04 ........................ Canada 2,000,000 1,820,000
Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ............. Indonesia 2,000,000 1,070,000
----------
34,260,250
----------
PRODUCER MANUFACTURING 4.5%
Aetna Industries Inc., senior note, 11.875%, 10/01/06 ................... United States 700,000 738,500
Goss Graphic Systems Inc., senior sub. note, 12.00%, 10/15/06 ........... United States 3,200,000 1,776,000
Nortek Inc., senior sub. note, 9.875%, 3/01/04 .......................... United States 5,500,000 5,720,000
Oshkosh Truck Corp., senior sub. note, 8.75%, 3/01/08 ................... United States 2,000,000 2,010,000
Simonds Industries Ind., senior sub. note, 144A, 10.25%, 7/01/08 ........ United States 2,750,000 2,818,750
Talon Automotive Group Inc., senior sub. note, B, 9.625%, 5/01/08 ....... United States 2,900,000 2,769,500
Terex Corp., senior sub. note, 8.875%, 4/01/08 .......................... United States 3,550,000 3,514,500
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 ....... Canada 750,000 708,750
----------
20,056,000
----------
RETAIL TRADE 1.1%
Hollywood Entertainment Corp., senior sub. note, B, 10.625%, 8/15/04 .... United States 4,000,000 4,060,000
Shoppers Food Warehouse Corp., senior note, 9.75%, 6/15/04 .............. United States 750,000 821,250
----------
4,881,250
----------
TECHNOLOGY SERVICES 1.1%
Anacomp Inc., senior sub. note, D, 10.875%, 4/01/04 ..................... United States 4,000,000 4,140,000
Decisionone Corp., senior sub. note, 9.75%, 8/01/07 ..................... United States 1,000,000 465,000
Decisionone Holding Corp., senior disc. deb., zero cpn. to 8/01/02,
11.50% thereafter, 8/01/08 .......................................... United States 2,500,000 512,500
----------
5,117,500
----------
</TABLE>
84
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TELECOMMUNICATIONS 20.6%
Arch Communications Group, senior disc. note, zero cpn. to 3/15/01,
10.875% thereafter, 3/15/08 .......................................... United States $ 6,000,000 $ 3,570,000
Dobson/Sygnet, Communications Co., senior note, A, 144A, 12.25%, 12/15/08 United States 4,500,000 4,545,000
Flag Ltd., senior note, 8.25%, 1/30/08 .................................. Bermuda 1,000,000 995,000
Global Crossing Holdings Ltd., senior note, 9.625%, 5/15/08 ............. Bermuda 5,000,000 5,287,500
ICO Global Communications, 15.00%, 8/01/05 .............................. Bermuda 5,000,000 3,750,000
IntelCom Group Inc., senior secured disc. note, zero cpn. to
5/01/01, 12.50% thereafter, 5/01/06 .................................. United States 3,250,000 2,421,250
Intermedia Communications Inc., senior disc. note, B, zero cpn. to
7/15/02, 11.25% thereafter, 7/15/07 .................................. United States 5,000,000 3,425,000
Iridium LLC/CAP, senior note, D, 10.875%, 7/15/05 ....................... Bermuda 5,350,000 4,574,250
IXC Communications Inc., senior sub. note, 9.00%, 4/15/08 ............... United States 2,250,000 2,250,000
Level 3 Communications Inc, senior disc. note, 144A, zero cpn
to 12/01/03, 10.50% thereafter, 12/01/08 ............................. United States 3,000,000 1,702,500
Level 3 Communications Inc., senior note, 9.125%, 5/01/08 ............... United States 5,000,000 4,962,500
McCaw International Ltd., senior disc. note, zero cpn. to 4/15/02,
13.00% thereafter, 4/15/07 ........................................... United States 7,000,000 3,937,500
Metrocall Inc., senior sub, note, 144A, 11.00%, 9/15/08 ................. United States 5,000,000 5,025,000
Millicom International Cellular SA, senior disc. note, zero cpn
to 6/01/01, 13.50% thereafter, 6/01/06 ............................... Luxembourg 9,300,000 6,603,000
Netia Holdings BV, senior disc. note, B, zero cpn. to
11/01/01, 11.25% thereafter, 11/01/07 ................................ Poland 2,000,000 1,145,000
Netia Holdings BV, senior note, B, 10.25%, 11/01/07 ..................... Poland 1,300,000 1,108,250
Nextel Communications Inc., senior disc. note, zero cpn
to 9/15/02, 10.65% thereafter, 9/15/07 ............................... United States 7,000,000 4,497,500
Nextel Communications Inc., senior disc. note, zero cpn
to 10/31/02, 9.75% thereafter, 10/31/07 .............................. United States 3,000,000 1,830,000
NEXTLINK Communications Inc., senior note, 9.625%, 10/01/07 ............. United States 1,400,000 1,344,000
NEXTLINK Communications Inc., senior note, 9.00%, 3/15/08 ............... United States 3,600,000 3,357,000
Northeast Optic Network Inc., senior note, 12.75%, 8/15/08 .............. United States 3,500,000 3,430,000
Orion Network Systems Inc., senior disc. note, zero cpn
to 1/15/02. 12.50% thereafter, 1/15/07 ............................... United States 1,500,000 945,000
Poland Telecom Finance, senior note, B, 14.00%, 12/01/07 ................ Poland 8,000,000 7,320,000
Rogers Cantel Mobile, senior secured deb., 9.75%, 6/01/16 ............... Canada 3,000,000 3,225,000
RSL Communications PLC, A, 144A, 12.00%, 11/01/08 ....................... United Kingdom 1,500,000 1,545,000
Sprint Spectrum LP, senior disc. note, zero cpn
to 8/15/01, 12.50% thereafter, 8/15/06 ............................... United States 10,000,000 9,050,000
-----------
91,845,250
-----------
TRANSPORTATION 4.1%
American Commercial Lines LLC, senior note, 10.25%, 6/30/08 ............. United States 3,100,000 3,162,000
Eletson Holdings, first mortgage, 9.25%, 11/15/03 ....................... Greece 1,600,000 1,528,000
Gearbulk Holding Ltd., senior note, 11.25%, 12/01/04 .................... Bermuda 4,500,000 4,770,000
GS Superhighway (Holdings) Ltd., senior note, 10.25%, 8/15/07 ........... Hong Kong 6,000,000 2,880,000
MRS Logistica SA, B, 144A, 10.625%, 8/15/05 ............................. Brazil 5,000,000 2,525,000
The Holt Group Inc., senior note, 144A, 9.75%, 1/15/06 .................. United States 5,250,000 3,648,750
-----------
18,513,750
-----------
UTILITIES 2.5%
AES Corp., senior sub. note, 8.50%, 11/01/07 ............................ United States 1,000,000 1,017,500
El Paso Electric Co., first mortgage, D, 8.90%, 2/01/06 ................. United States 2,500,000 2,856,250
Empire Gas Corp., senior secured note, 7.00%
to 7/15/99, 12.875% thereafter, 7/15/04 .............................. United States 5,000,000 3,900,000
Hermes Europe Railtel BV, senior note, 11.50%, 8/15/07 .................. Netherlands 2,000,000 2,130,000
Niagara Mohawk Power Corp., senior disc. note, H, zero cpn
to 7/01/03, 8.50% thereafter, 7/01/10 ................................ United States 1,500,000 1,140,000
-----------
11,043,750
-----------
TOTAL BONDS (COST $442,737,128) ......................................... 417,141,648
-----------
ZERO COUPON BONDS 1.5%
CONSUMER NON-DURABLES 1.3%
Revlon Worldwide Corp., senior disc. note, B, 3/15/01 ................... United States 10,000,000 5,750,000
-----------
TELECOMMUNICATIONS .2%
(b),(c) International Wireless Communications,
senior disc. note, 8/15/01 ........................................... United States 7,800,000 682,500
-----------
TOTAL ZERO COUPON BONDS (COST $13,142,703) .............................. 6,432,500
-----------
TOTAL LONG TERM INVESTMENTS (COST $457,417,080) ......................... 425,050,056
-----------
</TABLE>
85
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(f) REPURCHASE AGREEMENT 3.0%
Joint Repurchase Agreement 4.681%, 1/04/99
(Maturity Value $13,394,669) (COST $13,387,706) ...................... United States $ 13,387,706 $ 13,387,706
Barclays Capital Inc. (Maturity Value $680,213)
Bear, Stearns & Co. Inc. (Maturity Value $176,352)
Chase Securities Inc. (Maturity Value $1,385,618)
CIBC Oppenheimer Corp. (Maturity Value $1,385,618)
Donald, Lufkin & Jenrette Securities Corp. (Maturity Value $1,385,618)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,385,618)
Goldman, Sachs & Co. (Maturity Value $377,897)
Greenwich Capital Markets Inc. (Maturity Value $1,385,618)
Lehman Brothers Inc. (Maturity Value $251,928)
NationsBanc Montgomery Securities LLC (Maturity Value $1,385,618)
Paine Webber Inc. (Maturity Value $755,793)
Paribas Corp. (Maturity Value $1,385,618)
Warburg Dillon Read LLC (Maturity Value $1,453,160)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $470,804,786) 98.2% ............................. 438,437,762
OTHER ASSETS, LESS LIABILITIES 1.8% ..................................... 8,170,743
------------
NET ASSETS 100.0% ....................................................... $446,608,505
------------
</TABLE>
See currency abbreviations on page 162.
(*) Securities traded in U.S. Dollars unless otherwise indicated.
(a) Non-income producing.
(b) See Note 7 regarding defaulted securities.
(c) See Note 8 regarding restricted securities.
(f) See Note 1(c) regarding joint repurchase agreements.
86
See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 38.6%
CONSUMER DURABLES .3%
General Motors Corp. ............................................................... 55,000 $ 3,935,938
-------------
CONSUMER NON-DURABLES 2.2%
Philip Morris Cos. Inc. ............................................................ 450,000 24,075,000
RJR Nabisco Holdings Corp. ......................................................... 60,000 1,781,250
-------------
25,856,250
-------------
ELECTRONIC TECHNOLOGY .1%
(a)Anacomp Inc. ..................................................................... 85,000 1,583,125
-------------
ENERGY MINERALS 2.2%
Athabasca Oil Sands Trust (Canada) ................................................. 576,500 6,305,469
BP Prudhoe Bay Royalty Trust ....................................................... 50,000 237,500
Canadian Oil Sands Trust Units (Canada) ............................................ 500,000 5,777,995
Enron Oil & Gas Co. ................................................................ 340,000 5,865,000
Pioneer Natural Resources Co. ...................................................... 302,226 2,644,478
(a)Santa Fe Energy Resources Inc. ................................................... 279,642 2,062,360
Snyder Oil Corp. ................................................................... 30,000 399,375
Ultramar Diamond Shamrock Corp. .................................................... 125,000 3,031,250
-------------
26,323,427
-------------
NON-ENERGY MINERALS 1.3%
Anglo American Platinum Corp. Ltd., ADR (South Africa) ............................. 223,161 3,061,345
AngloGold Ltd., ADR (South Africa) ................................................. 395,000 7,727,188
De Beers Consolidated Mines AG, ADR (South Africa) ................................. 40,000 510,000
Freeport-McMoRan Copper & Gold Inc., A ............................................. 110,000 1,065,625
Impala Platinum Holdings Ltd., ADR (South Africa) .................................. 216,500 2,944,205
-------------
15,308,363
-------------
PROCESS INDUSTRIES .2%
(a)Dan River Inc., A ................................................................ 173,256 2,035,758
-------------
PRODUCER MANUFACTURING .6%
(a)Harvard Industries Inc. .......................................................... 137,330 1,047,139
McDermott International Inc. ....................................................... 260,000 6,418,750
-------------
7,465,889
-------------
REAL ESTATE 1.7%
Equity Residential Properties Trust ................................................ 150,000 6,065,625
FelCor Lodging Trust Inc. .......................................................... 275,000 6,342,188
Gables Residential Trust ........................................................... 150,000 3,478,125
Meditrust Cos. ..................................................................... 120,160 1,817,420
Simon Property Group Inc. .......................................................... 102,900 2,932,650
-------------
20,636,008
-------------
TELECOMMUNICATIONS .4%
U.S. West Inc. ..................................................................... 70,000 4,523,750
-------------
UTILITIES 29.6%
American Electric Power Co. Inc. ................................................... 390,000 18,354,375
Central & South West Corp. ......................................................... 500,000 13,718,750
Cinergy Corp. ...................................................................... 511,000 17,565,625
Conectiv Inc. ...................................................................... 500,000 12,250,000
Dominion Resources Inc. ............................................................ 325,000 15,193,750
Edison International ............................................................... 425,000 11,846,875
Energy East Corp. .................................................................. 125,000 7,062,500
Entergy Corp. ...................................................................... 500,000 15,562,500
FirstEnergy Corp. .................................................................. 300,000 9,768,750
Florida Progress Corp. ............................................................. 390,000 17,476,875
FPL Group Inc. ..................................................................... 192,700 11,875,138
GPU Inc. ........................................................................... 320,000 14,140,000
</TABLE>
87
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES (CONT.)
Hawaiian Electric Industries Inc. .................................................. 142,000 $ 5,715,500
Houston Industries Inc. ............................................................ 315,000 10,119,375
KeySpan Energy Corp. ............................................................... 352,000 10,912,000
Nevada Power Co. ................................................................... 175,000 4,550,000
New Century Energies Inc. .......................................................... 380,000 18,525,000
New England Electric System ........................................................ 330,000 15,881,250
Northern States Power Co. .......................................................... 210,000 5,827,500
PacifiCorp ......................................................................... 120,000 2,527,500
PECO Energy Co. .................................................................... 400,000 16,650,000
PG&E Corp. ......................................................................... 450,000 14,175,000
Potomac Electric Power Co. ......................................................... 300,000 7,893,750
Public Service Enterprise Group Inc. ............................................... 320,000 12,800,000
SCANA Corp. ........................................................................ 150,000 4,837,500
Sempra Energy ...................................................................... 525,000 13,321,875
Southern Co. ....................................................................... 480,000 13,950,000
Texas Utilities Co. ................................................................ 437,450 20,423,447
Western Resources Inc. ............................................................. 215,000 7,148,750
------------
350,073,585
------------
TOTAL COMMON STOCKS (COST $369,133,416) ............................................ 457,742,093
------------
PREFERRED STOCKS .1%
Freeport-McMoRan Copper & Gold Inc., 0.00%, pfd., Gold (COST $3,846,805) ........... 108,800 1,618,400
------------
CONVERTIBLE PREFERRED STOCKS 7.9%
CONSUMER SERVICES 1.0%
CSC Holdings Inc., 8.50%, cvt. pfd., I ............................................. 75,000 5,653,125
Host Marriott Corp., 6.75%, cvt. pfd., 144A ........................................ 100,000 4,100,000
MediaOne Group Inc., 6.25%, cvt. pfd. .............................................. 30,000 1,995,000
------------
11,748,125
------------
ENERGY MINERALS 1.0%
Chesapeake Energy Corp., 7.00%, cvt. pfd., 144A .................................... 85,000 871,250
Devon Financing Trust, $3.25, cvt. pfd., 144A ...................................... 60,000 3,438,750
Lomak Financing Trust, 5.75%, cvt. pfd. ............................................ 10,000 181,250
Lomak Financing Trust, 5.75% cvt. pfd., 144A ....................................... 120,000 2,175,000
Nuevo Energy Co., 5.75%, cvt. pfd., A .............................................. 140,000 4,497,500
Patina Oil & Gas Corp., 7.125%, cvt. pfd. .......................................... 39,525 706,509
------------
11,870,259
------------
NON-ENERGY MINERALS 1.4%
Armco Inc., $3.625, cvt. pfd., B ................................................... 65,000 2,827,500
Battle Mountain Gold Co., $3.25, cvt. pfd. ......................................... 66,300 2,477,963
Coeur D'Alene Mines Corp., 7.00%, cvt. pfd. ........................................ 135,000 911,250
Cyprus Amax Minerals Co., $4.00, cvt. pfd., A ...................................... 55,000 1,938,750
Hecla Mining Co., 7.00%, cvt. pfd., B .............................................. 70,000 2,660,000
Kinam Gold Inc., $3.75, cvt. pfd., B ............................................... 150,000 5,400,000
------------
16,215,463
------------
PRODUCER MANUFACTURING .3%
EVI Inc., 5.00% cvt. pfd., 144A .................................................... 125,000 3,718,750
------------
REAL ESTATE 2.6%
Archstone Communities Trust, $1.75, cvt. pfd., A ................................... 400,000 10,700,000
Glenborough Realty Trust, 7.75%, cvt. pfd., A ...................................... 355,000 6,478,750
Innkeepers USA Trust, 8.625%, cvt. pfd., A ......................................... 175,000 3,543,750
Prologis Trust, 7.00%, cvt. pfd., B ................................................ 135,000 3,560,625
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A .............................. 180,000 3,802,500
Vornado Realty Trust, 6.50%, cvt. pfd., A .......................................... 60,000 2,910,000
------------
30,995,625
------------
</TABLE>
88
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
TELECOMMUNICATIONS .6%
Nortel Inversora SA, 10.00%, cvt. pfd. (Argentina) ................................. 150,000 $ 7,800,000
-------------
TRANSPORTATION .2%
Union Pacific Capital Trust, 6.25%, cvt. pfd. ...................................... 40,000 1,840,000
-------------
UTILITIES .8%
(c)CMS Energy Corp., 7.75%, cvt. pfd. ............................................... 160,000 9,440,000
-------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $108,833,059) ............................. 93,628,222
-------------
PRINCIPAL
AMOUNT*
-------
<S> <C> <C>
BONDS 17.2%
CONSUMER DURABLES .2%
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ......................... $ 3,750,000 1,893,750
-------------
CONSUMER NON-DURABLES 3.4%
Compania Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 (Argentina) ........ 2,000,000 1,530,000
Del Monte Corp., senior sub. note, B, 12.25%, 4/15/07 .............................. 4,000,000 4,500,000
Doane Pet Care Co., senior sub. note, 144A, 9.75%, 5/15/07 ......................... 2,197,000 2,257,418
Evenflo Company Inc., senior note, 144A, 11.75%, 8/15/06 ........................... 2,000,000 2,070,000
Hartmarx Corp., senior sub. note, 144A, 10.875%, 1/15/02 ........................... 8,300,000 8,341,500
International Home Foods, senior sub. note, 10.375%, 11/01/06 ...................... 4,100,000 4,458,750
Playtex Family Products Corp., senior sub. note, 9.00%, 12/15/03 ................... 8,000,000 8,320,000
RJR Nabisco Inc., senior note, 9.25%, 8/15/13 ...................................... 5,000,000 5,133,370
Specialty Foods Corp., senior note, B, 10.25%, 8/15/01 ............................. 4,000,000 3,660,000
The William Carter Co., senior sub. note, A, 10.375%, 12/01/06 ..................... 500,000 547,500
-------------
40,818,538
-------------
CONSUMER SERVICES 4.0%
AMF Bowling Worldwide Inc., senior sub. note, B, 10.875%, 3/15/06 .................. 650,000 529,750
Aztar Corp., senior sub. note, 11.00%, 10/01/02 .................................... 9,000,000 9,225,000
Benedek Broadcasting, senior note, 11.875%, 3/01/05 ................................ 2,000,000 2,140,000
Continental Cablevision Inc., senior sub. deb., 9.50%, 8/01/13 ..................... 8,000,000 9,537,328
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ............................... 4,000,000 4,470,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ............................ 500,000 522,500
Hard Rock Hotel Inc., senior sub. note, B, 9.25%, 4/01/05 .......................... 500,000 502,500
Harvey's Casino Resorts, senior sub. note, 10.625%, 6/01/06 ........................ 2,200,000 2,387,000
Helicon Group, S.F., senior secured note, B, 11.00%, 11/01/03 ...................... 7,300,000 7,628,500
Rio Hotel & Casino Inc., senior sub. note, 10.625%, 7/15/05 ........................ 8,000,000 8,760,000
Venetian Casino/Las Vegas Sands, mortgage note, 12.25%, 11/15/04 ................... 2,000,000 1,860,000
-------------
47,562,578
-------------
ELECTRONIC TECHNOLOGY .9%
Anacomp Inc., senior sub. note, B, 10.875%, 4/01/04 ................................ 6,000,000 6,210,000
Maxtor Corp., cvt. sub. deb., 5.75%, 3/01/12 ....................................... 1,500,000 967,500
Samsung Electronics America Inc., A, 9.75%, 5/01/03 ................................ 4,000,000 3,860,000
-------------
11,037,500
-------------
ENERGY MINERALS 2.1%
Bellwether Exploration Co., senior sub. note, 10.875%, 4/01/07 ..................... 1,000,000 975,000
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 (Mexico) ............. 9,000,000 8,415,000
Denbury Management Inc., senior sub. note, 9.00%, 3/01/08 .......................... 4,000,000 3,380,000
Gerrity Oil & Gas Corp., senior sub. note, 11.75%, 7/15/04 ......................... 9,835,000 9,884,175
Mesa Operating Co., senior sub. note, 10.625%, 7/01/06 ............................. 1,000,000 1,107,500
Plains Resources Inc., senior sub. note, B, 10.25%, 3/15/06 ........................ 1,000,000 1,010,000
-------------
24,771,675
-------------
</TABLE>
89
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
FINANCE .3%
IBJ Preferred Capital Co. LLC, A, 8.79%, 12/29/49 .................................. $ 4,000,000 $ 3,320,000
-------------
HEALTH TECHNOLOGY .5%
Dade International Inc., senior sub. note, B, 11.125%, 5/01/06 ..................... 3,000,000 3,345,000
ICN Pharmaceuticals Inc., senior note, B, 9.25%, 8/15/05 ........................... 3,000,000 3,090,000
-------------
6,435,000
-------------
INDUSTRIAL SERVICES .2%
First Wave Marine Inc., senior note, 11.00%, 2/01/08 ............................... 1,000,000 935,000
Great Lakes Dredge & Dock Corp., senior sub. note, 144A, 11.25%, 8/15/08 ........... 1,000,000 1,030,000
-------------
1,965,000
-------------
NON-ENERGY MINERALS .3%
Trizec Hahn Corp., cvt. senior deb., 3.00%, 1/29/21 (Canada) ....................... 5,500,000 4,063,125
-------------
PROCESS INDUSTRIES 3.2%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 ...................... 6,000,000 6,285,000
Asia Pulp & Paper Co. Ltd., 12.00%, 12/29/49 (Indonesia) ........................... 5,000,000 2,900,000
Consoltex Group Inc., senior sub. note, B, 11.00%, 10/01/03 ........................ 10,000,000 10,200,000
Four M Corp., senior note, B, 12.00%, 6/01/06 ...................................... 2,000,000 1,530,000
Packaging Resources Inc., senior note, 11.625%, 5/01/03 ............................ 3,000,000 3,165,000
Printpack Inc., senior sub. note, B, 10.625%, 8/15/06 .............................. 3,000,000 2,955,000
RBX Corp., senior sub. note, B, 11.25%, 10/15/05 ................................... 10,000,000 1,650,000
Riverwood International, senior sub. note, 10.875%, 4/01/08 ........................ 5,000,000 4,550,000
Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 (Indonesia) ............ 6,500,000 3,477,500
U.S. Can Corp., senior sub. note, B, 10.125%, 10/15/06 ............................. 300,000 309,000
UCC Investors, senior note, 10.50%, 5/01/02 ........................................ 725,000 786,625
-------------
37,808,125
-------------
PRODUCER MANUFACTURING 1.1%
Collins & Aikman Corp., senior sub. note, 11.50%, 4/15/06 .......................... 4,000,000 4,180,000
Nortek Inc., senior sub. note, 9.875%, 3/01/04 ..................................... 2,000,000 2,080,000
Outsourcing Services Group, senior sub. note, 144A, 10.875%, 3/01/06 ............... 2,000,000 1,910,000
Thermadyne Industries Inc., sub. note, 10.75%, 11/01/03 ............................ 2,696,000 2,709,480
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 (Canada) ......... 1,350,000 1,275,750
-------------
12,155,230
-------------
TELECOMMUNICATIONS .6%
Metrocall Inc., senior sub. note, 144A, 11.00%, 9/15/08 ............................ 3,000,000 3,015,000
Paging Network, senior sub. note, 10.125%, 8/01/07 ................................. 3,000,000 2,910,000
Telewest Communications PLC, senior note, 144A, 11.25%, 11/01/08 (United Kingdom) .. 1,000,000 1,125,000
-------------
7,050,000
-------------
UTILITIES .4%
Midland Funding Corp. I, C-94, 10.33%, 7/23/02 ..................................... 2,732,274 2,902,041
Texas-New Mexico Power Co., secured deb., 10.75%, 9/15/03 .......................... 2,000,000 2,151,978
-------------
5,054,019
-------------
TOTAL BONDS (COST $213,066,723) .................................................... 203,934,540
-------------
CONVERTIBLE BONDS 4.3%
ELECTRONIC TECHNOLOGY .7%
BEA Systems, Inc., cvt., 4.00%, 6/15/05 ............................................ 750,000 461,250
Trans-Lux Corp., cvt. sub. note, 7.50%, 12/01/06 ................................... 8,000,000 7,800,000
-------------
8,261,250
-------------
ENERGY MINERALS 1.1%
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 .................................... 9,000,000 8,865,000
Swift Energy Co., cvt. sub. note, 6.25%, 11/15/06 .................................. 5,000,000 3,562,500
-------------
12,427,500
-------------
</TABLE>
90
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH SERVICES .3%
Continucare Corp., cvt. sub. note, 144A, 8.00%, 10/31/02 ........................... $ 9,500,000 $ 3,135,000
Medical Care International Inc., cvt. sub. deb., 6.75%, 10/01/06 ................... 1,000,000 880,000
-------------
4,015,000
-------------
INDUSTRIAL SERVICES .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 ....................... 3,660,000 2,433,900
-------------
NON-ENERGY MINERALS .6%
Ashanti Capital Ltd., cvt., 5.50%, 3/15/03 (Ghana) ................................. 5,000,000 3,925,000
Coeur D'Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 ................... 100,000 59,000
Coeur D'Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ......................... 6,000,000 3,480,000
-------------
7,464,000
-------------
PROCESS INDUSTRIES .3%
APP Finance VI Mauritius, cvt., 11/18/12 (Singapore) ............................... 11,500,000 1,681,875
FMC Corp., cvt. senior sub. deb., 6.75%, 1/16/05 ................................... 1,800,000 1,638,000
-------------
3,319,875
-------------
PRODUCER MANUFACTURING .2%
Exide Corp., cvt. senior sub. note, 144A, 2.90%, 12/15/05 .......................... 4,000,000 2,360,000
-------------
REAL ESTATE .8%
Meristar Hospitality Corp., cvt. sub. note, 4.75%, 10/15/04 ........................ 5,500,000 3,994,375
The Macerich Co., cvt., 144A, 7.25%, 12/15/02 ...................................... 5,500,000 5,280,000
-------------
9,274,375
-------------
RETAIL TRADE .1%
Drug Emporium Inc., S.F., cvt. sub. deb., 7.75%, 10/01/14 .......................... 1,180,000 985,300
-------------
TOTAL CONVERTIBLE BONDS (COST $63,374,773) ......................................... 50,541,200
-------------
ZERO COUPON/STEP-UP BONDS 2.2%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to 3/15/01,
12.25% thereafter, 3/15/06 ......................................................... 2,438,000 1,407,945
Marcus Cable Co., zero cpn. to 6/15/00, 14.25% thereafter, 12/15/05 ................ 14,000,000 13,335,000
Mesa Operating Co., zero cpn. to 7/01/01,11.625% thereafter, 7/01/06 ............... 1,300,000 997,750
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03,
9.95% thereafter, 2/15/08 .......................................................... 8,200,000 4,899,500
Nextel International Inc., senior disc. note, zero cpn. to 4/15/03,
12.125% thereafter, 4/15/08 ........................................................ 5,000,000 2,300,000
Revlon Worldwide Corp., senior disc. note, B, 3/15/01 .............................. 6,000,000 3,450,000
-------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $27,628,177) ................................. 26,390,195
-------------
U.S. GOVERNMENT SECURITIES 13.3%
U.S. Treasury Bond, 7.125%, 2/15/23 ................................................ 20,000,000 24,681,260
U.S. Treasury Bond, 6.25%, 8/15/23 ................................................. 86,000,000 96,239,418
U.S. Treasury Bond, 6.00%, 2/15/26 ................................................. 23,000,000 25,105,949
U.S. Treasury Note, 6.375%, 8/15/02 ................................................ 11,000,000 11,605,000
-------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $135,751,766) ............................... 157,631,627
-------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 13.7%
Escom, E168, utility deb., 11.00%, 6/01/08 (South Africa) .......................... 120,000,000 ZAR 15,145,974
Republic of Argentina, FRN, 5.75%, 3/31/23 ......................................... 100,000,000 72,187,500
Republic of Brazil, FRN, 6.75%, 1/01/01 ............................................ 6,150,000 5,581,125
Republic of Brazil, FRN, 6.125%, 4/15/06 ........................................... 15,360,000 9,945,600
Republic of Brazil, FRN, 5.50%, 4/15/24 ............................................ 39,000,000 23,400,000
Republic of Korea, 8.875%, 4/15/08 ................................................. 24,000,000 24,780,000
Republic of South Africa, 12.00%, 2/28/05 .......................................... 50,000,000 ZAR 7,182,015
Russia Ministry of Finance, 11.75%, 6/10/03 ........................................ 9,000,000 2,599,983
Russia Ministry of Finance, 10.00%, 6/26/07 ........................................ 8,000,000 2,280,000
-------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $160,240,931) ................. 163,102,197
-------------
TOTAL LONG TERM INVESTMENTS (COST $1,081,875,650) .................................. 1,154,588,474
-------------
</TABLE>
91
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT .8%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $9,203,381) (COST $9,198,596) ...... $ 9,198,596 $ 9,198,596
Barclays Capital Inc. (Maturity Value $467,370)
Bear, Stearns & Co. Inc. (Maturity Value $121,171)
Chase Securities Inc. (Maturity Value $952,048)
CIBC Oppenheimer Corp. (Maturity Value $952,048)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $952,048)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $952,048)
Goldman, Sachs & Co. (Maturity Value $259,650)
Greenwich Capital Markets Inc. (Maturity Value $952,048)
Lehman Brothers Inc. (Maturity Value $173,100)
NationsBanc Montgomery Securities LLC (Maturity Value $952,048)
Paine Webber Inc. (Maturity Value $519,299)
Paribas Corp. (Maturity Value $952,048)
Warburg Dillon Read LLC (Maturity Value $998,455)
Collateralized by U.S. Treasury Bills & Notes ............................................... --------------
TOTAL INVESTMENTS (COST $1,091,074,246) 98.1% .................................................. 1,163,787,070
OTHER ASSETS, LESS LIABILITIES 1.9% ............................................................ 22,052,817
--------------
NET ASSETS 100.0% .............................................................................. $1,185,839,887
==============
</TABLE>
See currency abbreviations on page 162.
*Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income producing.
(c)See Note 8 regarding restricted securities.
(f)See Note 1(c) regarding joint repurchase agreements.
92 See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MONEY MARKET FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT 19.3%
Bank of America NT & SA, 5.10%, 3/05/99 ............................................ $ 5,000,000 $ 5,000,000
Bayerische Vereinsbank, New York Branch, 4.95%, 5/18/99 - 5/19/99 .................. 10,000,000 10,000,000
Commerzbank AG, New York Branch, 5.43%, 1/26/99 .................................... 5,000,000 5,000,034
Deutsche Bank AG, New York Branch, 5.685%, 6/03/99 ................................. 4,850,000 4,851,929
Dresdner Bank AG, New York Branch, 5.09%, 4/07/99 .................................. 5,000,000 5,000,130
Landesbank Hessen Thuringen, New York Branch, 5.27%, 1/12/99 ....................... 5,000,000 5,000,008
National Westminster Bank, New York Branch, 5.745%, 4/06/99 ........................ 5,000,000 4,997,823
Rabobank Nederland, NV, New York Branch, 5.70%, 4/20/99 ............................ 5,000,000 4,997,591
Societe Generale, New York Branch, 5.56% - 5.58%, 1/19/99 - 1/22/99 ................ 10,000,000 9,999,784
Swiss Bank Corp., New York Branch, 5.81%, 4/29/99 .................................. 5,000,000 4,999,381
Toronto Dominion Bank, New York Branch, 4.94% - 5.59%, 2/09/99 - 6/15/99 ........... 10,000,000 10,000,000
UBS AG, New York Branch, 5.11%, 1/14/99 - 1/15/99 .................................. 10,000,000 10,000,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (COST $79,846,680) ................................... 79,846,680
-----------
(d)COMMERCIAL PAPER 63.9%
AIG Funding Inc., 5.35%, 1/12/99 - 1/13/99 ......................................... 10,000,000 9,982,910
American Express Credit Corp., 5.00% - 5.30%, 1/04/99 - 3/04/99 .................... 15,000,000 14,951,796
Associates Corp. of North America, 5.01% - 5.35%, 1/25/99 - 2/03/99 ................ 15,000,000 14,936,938
Bellsouth Telecommunications Inc., 5.15%, 2/24/99 .................................. 5,000,000 4,961,375
Campbell Soup Co., 4.97% - 5.07%, 3/17/99 - 3/29/99 ................................ 17,000,000 16,801,474
Canada Bills, 4.83%, 5/11/99 ....................................................... 5,000,000 4,912,792
Canadian Imperial Holdings Inc., 4.94%, 4/12/99 .................................... 5,000,000 4,930,703
Canadian Wheat Board, 5.05%, 2/05/99 ............................................... 5,000,000 4,975,451
Chevron U.K. Investment PLC, 4.87% - 4.90%, 5/14/99 - 5/21/99 ...................... 15,000,000 14,722,774
CIESCO, L.P., 5.00% - 5.125%, 1/06/99 - 1/08/99 .................................... 10,000,000 9,991,545
Coca Cola Co., 5.07%, 2/17/99 - 2/19/99 ............................................ 15,000,000 14,898,600
Commerzbank US Finance Inc., 5.45%, 2/12/99 ........................................ 5,000,000 4,968,208
Dupont (E.I.) De Nemours & Co., 4.90% - 5.16%, 1/07/99 - 4/14/99 ................... 15,000,000 14,896,986
Export Development Corp., 4.95%, 1/20/99 ........................................... 5,000,000 4,986,937
General Electric Capital Corp., 5.34% - 5.48%, 1/14/99 - 1/25/99 ................... 20,000,000 19,943,982
International Lease Finance Corp., 5.12%, 2/04/99 .................................. 5,000,000 4,975,822
J. P. Morgan & Co. Inc., 4.94%, 4/13/99 ............................................ 5,000,000 4,930,017
Merrill Lynch & Co. Inc., 5.31% - 5.33%, 1/11/99 - 1/29/99 ......................... 10,000,000 9,971,947
Motorola Inc., 5.07% - 5.12%, 1/26/99 - 1/28/99 .................................... 10,000,000 9,963,210
National Rural Utilities Cooperative Finance Corp., 4.94% - 5.12%, 2/08/99 - 4/16/99 17,575,000 17,428,611
Province of Alberta, 5.34%, 1/20/99 ................................................ 10,000,000 9,971,817
Province of British Columbia, 4.80% - 5.29%, 3/08/99 - 6/09/99 ..................... 17,000,000 16,721,887
Societe Generale N.A. Inc., 5.30%, 1/21/99 ......................................... 5,000,000 4,985,278
Toyota Motor Credit Corp., 5.15% - 5.36%, 1/15/99 - 2/05/99 ........................ 10,000,000 9,964,543
Walt Disney Co., 5.15%, 1/26/99 - 1/28/99 .......................................... 15,000,000 14,944,208
-----------
TOTAL COMMERCIAL PAPER (COST $264,719,811) ......................................... 264,719,811
-----------
U.S. GOVERNMENT AGENCY SECURITIES 11.7%
Federal Farm Credit Bank, 4.80%, 4/30/99 ............................................ 10,000,000 9,841,333
Federal Home Loan Bank, 4.72% - 4.81%, 5/26/99 - 6/16/99 ........................... 10,099,000 9,891,155
Freddie Mac, 4.78% - 4.86%, 3/26/99 - 5/14/99 ...................................... 14,439,000 14,247,210
Fannie Mae, 4.72% - 4.74%, 6/10/99 ................................................. 15,000,000 14,684,444
-----------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $48,664,142) ......................... 48,664,142
===========
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $393,230,633) ................. 393,230,633
===========
</TABLE>
93
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MONEY MARKET FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(g)REPURCHASE AGREEMENTS 4.8%
NationsBanc Montgomery Securities LLC, 4.50%, 1/04/99 (Maturity Value $9,959,977)
Collateralized by U.S. Treasury Notes ......................................... $ 9,955,000 $ 9,955,000
Warburg Dillon Read LLC, 4.75%, 1/04/99 (Maturity Value $9,960,254)
Collateralized by U.S. Treasury Notes ......................................... 9,955,000 9,955,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $19,910,000) .................................. 19,910,000
------------
TOTAL INVESTMENTS (COST $413,140,633) 99.7% ..................................... 413,140,633
OTHER ASSETS, LESS LIABILITIES .3% .............................................. 1,200,125
------------
NET ASSETS 100.0% ............................................................... $414,340,758
============
</TABLE>
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
(g)See Note 1(c) regarding repurchase agreements.
94 See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 79.8%
AUTOMOBILES .7%
General Motors Corp. ................................................. United States 20,000 $ 1,431,250
Volvo AB, B .......................................................... Sweden 5,000 114,733
------------
1,545,983
------------
BANKING 3.6%
Banca Nazionale del Lavoro SpA, di Risp .............................. Italy 484,000 1,354,895
Bank One Corp. ....................................................... United States 10,700 546,369
BankAmerica Corp. .................................................... United States 10,738 645,622
Crestar Financial Corp. .............................................. United States 2,700 194,400
Kapital Holding ...................................................... Denmark 12,740 630,544
Merita AS ............................................................ Finland 130,600 830,533
UST Corp., Inc. ...................................................... United States 85,000 2,002,813
Vermont Financial Services Corp. ..................................... United States 58,100 1,931,825
------------
8,137,001
------------
BEVERAGES & TOBACCO 3.6%
Farmer Brothers Co. .................................................. United States 7,000 1,498,000
Heineken Holding NV, A ............................................... Netherlands 8,917 427,628
Kita Kyushu Coca-Cola Bottling Co. Ltd. .............................. Japan 36,700 1,151,755
Mikuni Coca-Cola Bottling Co. ........................................ Japan 35,000 749,335
Philip Morris Companies. Inc. ........................................ United States 34,000 1,819,000
RJR Nabisco Holdings Corp. ........................................... United States 82,000 2,434,375
Shikoku Coca-Cola Bottling Co. Ltd. .................................. Japan 1,300 15,893
------------
8,095,986
------------
BROADCASTING & PUBLISHING 5.3%
Alma Media OYJ, Series 2 ............................................. Finland 39,100 1,274,144
(a)Capstar Broadcasting Corp., A ....................................... United States 4,100 93,788
(a)Chancellor Media Corp., A ........................................... United States 27,800 1,330,925
Dow Jones & Co. Inc. ................................................. United States 39,500 1,900,938
(a)Mediaone Group Inc. ................................................. United States 19,000 893,000
(a) Modern Times Group AB .............................................. Sweden 72,000 1,065,903
NV Holdingsmij de Telegraaf .......................................... Netherlands 83,150 2,237,478
Seat Pagine Gialle SpA ............................................... Italy 2,469,000 1,897,109
United News & Media Plc. ............................................. United Kingdom 106,280 920,368
Washington Post Co., B ............................................... United States 500 288,969
------------
11,902,622
------------
BUSINESS & PUBLIC SERVICES 5.5%
Corporate Services Group Plc., A ..................................... United Kingdom 893,191 2,251,367
IFIL Finanziaria Partecipazioni SpA .................................. Italy 324,000 1,356,761
Ratin AS, B .......................................................... Denmark 365 77,422
Sophus Berendsen AS, B ............................................... Denmark 53,118 1,844,462
Suez Lyonnaise des Eaux SA ........................................... France 32,968 6,775,136
(a)Suez Lyonnaise des Eaux SA, fgn. .................................... France 8,300 242
------------
12,305,390
------------
CHEMICALS 2.9%
(a) Bush Boake Allen Inc. .............................................. United States 55,000 1,938,750
Chemfirst Inc. ....................................................... United States 43,000 849,250
Morton International Inc. ............................................ United States 75,100 1,839,950
Olin Corp. ........................................................... United States 16,100 455,831
Yule Catto & Company Plc. ............................................ United Kingdom 318,144 1,323,284
------------
6,407,065
------------
DATA PROCESSING & REPRODUCTION .4%
(a)National Processing Inc. ............................................ United States 34,000 187,000
Tecnost Mael SpA ..................................................... Italy 201,100 663,446
------------
850,446
------------
</TABLE>
95
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRICAL & ELECTRONICS 2.3%
Philips Electronics NV ............................................... Netherlands 28,100 $ 1,886,609
------------
Philips Electronics NV, ADR .......................................... Netherlands 5,300 358,744
Racal Electronics Plc. ............................................... United Kingdom 349,303 2,016,607
(a)Wang Laboratories Inc., A ........................................... United States 28,100 779,775
------------
5,041,735
------------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
(a)Amphenol Corp., A ................................................... United States 10,032 302,841
(a)NBS Technologies Inc. ............................................... Canada 54,600 56,875
------------
359,716
------------
ENERGY EQUIPMENT & SERVICES 3.7%
Baker Hughes Inc. .................................................... United States 54,900 971,044
(a)BJ Services Co. ..................................................... United States 73,000 1,140,625
(a) Cie Generale De Geophysique SA ..................................... France 8,600 501,418
(a) Cie Generale De Geophysique SA, ADR ................................ France 30,000 326,250
(a) Cooper Cameron Corp. ............................................... United States 37,500 918,750
ISIS SA .............................................................. France 8,278 591,265
(a) Noble Drilling Corp. ............................................... United States 66,100 855,169
Transocean Offshore Inc. ............................................. United States 42,900 1,150,256
(a) Veritas DGC Inc. ................................................... United States 100,400 1,305,200
(a) Weatherford International Inc. ..................................... United States 27,000 523,125
------------
8,283,102
------------
ENERGY SOURCES 4.0%
(a) Conoco Inc., A ..................................................... United States 15,000 313,125
Electrafina SA ....................................................... Belgium 32,809 4,297,653
(a) Ocean Energy Inc. .................................................. United States 52,900 333,931
(a) Santa Fe Energy Resources Inc. ..................................... United States 147,700 1,089,288
Societe Elf Aquitaine SA, Br. ........................................ France 21,300 2,463,177
Societe Elf Aquitaine SA, ADR ........................................ France 9,000 509,625
------------
9,006,799
------------
FINANCIAL SERVICES 7.8%
(a) Amerin Corp. ....................................................... United States 200 4,725
Bankers Trust Corp. .................................................. United States 4,500 384,469
Bear Stearns Co. Inc. ................................................ United States 19,700 736,288
(a) Cir Cie Industriali Riunite SpA Torino ............................. Italy 500,900 562,279
(a) Cir Cie Industriali Riunite SpA Torino, Di Risp .................... Italy 132,400 142,201
CIT Group Inc., A .................................................... United States 34,500 1,097,531
Corporacion Financiera Alba SA ....................................... Spain 13,850 2,316,551
Electra Investment Trust Plc. ........................................ United Kingdom 139,500 1,270,714
Greenpoint Financial Corp. ........................................... United States 21,500 755,188
Household International Inc. ......................................... United States 45,200 1,791,050
Indymac Mortgage Holdings Inc. ....................................... United States 30,700 324,269
(c)Laser Mortgage Management Inc. ...................................... United States 94,000 511,125
Lehman Brothers Holdings Inc. ........................................ United States 42,100 1,855,031
(a) Mercury European Privitization Trust Plc., wts. .................... United Kingdom 540,000 552,533
Metris Cos. Inc. ..................................................... United States 14,600 734,563
Morgan Stanley Dean Witter & Co. ..................................... United States 17,000 1,207,000
Pargesa Holdings SA .................................................. Switzerland 700 1,105,934
Pioneer Group Inc. ................................................... United States 60,600 1,196,850
Sunamerica Inc. ...................................................... United States 13,200 1,070,850
------------
17,619,151
------------
FOOD & HOUSEHOLD PRODUCTS 1.5%
Hillsdown Holdings Plc. .............................................. United Kingdom 859,900 1,087,304
(a) Rubbermaid Inc ..................................................... United States 10,700 336,381
(a) Scott's Restaurants Inc. ........................................... Canada 18,800 86,901
</TABLE>
96
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
(a)Scott's Restaurants Inc., C ......................................... Canada 50,000 $ 224,609
U.S. Industries Inc. ................................................. United States 83,500 1,555,188
-----------
3,290,383
-----------
HEALTH & PERSONAL CARE .1%
(a) Ventas Inc. ........................................................ United States 25,700 313,219
-----------
INDUSTRIAL COMPONENTS 3.0%
BTR Plc. ............................................................. United Kingdom 382,200 782,141
Charter Plc. ......................................................... United Kingdom 137,000 743,066
DT Industries Inc. ................................................... United States 100,000 1,575,000
Konin Emballage Ind Van Leer ......................................... Netherlands 2,400 50,514
Lucas Varity Plc. .................................................... United Kingdom 665,000 2,190,666
Lucas Varity Plc., ADR ............................................... United Kingdom 11,500 385,250
(a)Owens-Illinois Inc. ................................................. United States 31,600 967,750
-----------
6,694,387
-----------
INSURANCE 1.6%
(a) Alleghany Corp. .................................................... United States 2,020 379,508
Allmerica Financial Corp. ............................................ United States 1,500 86,813
Assurances Generales de France AGF ................................... France 16,912 1,010,566
Berkeley W R Corp. ................................................... United States 21,800 742,563
(a) Companhia de Seguros Mundial Confianca SA .......................... Portugal 14,600 464,342
Provident Companies Inc. ............................................. United States 3,500 145,250
Sampo Insurance Co. Plc., A .......................................... Finland 22,000 838,567
-----------
3,667,609
-----------
LEISURE & TOURISM 1.0%
(a) Promus Hotel Corp. ................................................. United States 16,700 540,663
Thistle Hotels Plc. .................................................. United Kingdom 988,135 1,767,316
-----------
2,307,979
-----------
MACHINERY & ENGINEERING 2.7%
(a) Gardner Denver Inc. ................................................ United States 70,000 1,032,500
IMI Plc. ............................................................. United Kingdom 169,400 669,370
Siebe Plc. ........................................................... United Kingdom 196,100 769,979
(a) Sulzer AG .......................................................... Switzerland 600 365,198
TT Group Plc. ........................................................ United Kingdom 546,250 1,940,344
United Dominion Industries Ltd. ...................................... Canada 65,600 1,336,600
-----------
6,113,991
-----------
MERCHANDISING 1.3%
(a) Federated Department Stores Inc. ................................... United States 12,600 548,888
FKI Plc. ............................................................. United Kingdom 710,500 1,589,922
(a) Toys R Us Inc. ..................................................... United States 50,300 848,813
-----------
2,987,623
-----------
METALS & MINING 1.5%
(a) Olympic Steel Inc. ................................................. United States 35,300 176,500
(a) Stillwater Mining Co. .............................................. United States 22,600 926,600
Trelleborg AB, B ..................................................... Sweden 279,300 2,274,149
-----------
3,377,249
-----------
MULTI-INDUSTRY 18.6%
Aker RGI ASA, A ...................................................... Norway 69,500 729,755
Albatros Investissement SA ........................................... France 11,800 422,470
(a) Berkshire-Hathaway Inc., A ......................................... United States 21 1,470,000
Brierley Investments Ltd. ............................................ New Zealand 4,767,154 1,082,849
CGIP-Compagnie Generale Industrie de Participation ................... France 66,330 3,657,162
Cie Financiere Richemont AG, A ....................................... Switzerland 2,861 4,045,185
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MULTI-INDUSTRY (CONT.)
Custos AB, A ............................................................. Sweden 72,400 $ 1,429,100
Custos AB, B ............................................................. Sweden 81,540 1,594,425
Financiere Et Industrielle Gaz Et Eaux SA ................................ France 7,410 393,965
Forvaltnings AB Ratos, B ................................................. Sweden 168,200 1,182,783
Inchcape Plc. ............................................................ United Kingdom 462,800 989,432
Investor AB, A ........................................................... Sweden 24,150 1,075,545
Investor AB, B ........................................................... Sweden 95,850 4,327,901
Invik & Co. AB, B ........................................................ Sweden 13,500 1,099,213
Kansas City Southern Industries Inc. ..................................... United States 134,000 6,591,125
Kinnevik AB, B ........................................................... Sweden 37,887 888,072
Lagardere S.C.A .......................................................... France 36,870 1,567,546
Montedison SpA ........................................................... Italy 2,800,000 3,713,654
Rieber & Son AS, B ....................................................... Norway 100,000 741,567
(a)Saab AB, B .............................................................. Sweden 184,100 1,930,531
(a)Societe Europeenne de Communication SA, ADR ............................. Sweden 18,000 326,250
Ste Eurafrance ........................................................... France 1,633 1,081,612
Tomkins Plc. ............................................................. United Kingdom 293,718 1,382,950
-----------
41,723,092
-----------
REAL ESTATE 2.2%
(a)Asticus AB .............................................................. Sweden 49,285 483,377
Castellum AB ............................................................. Sweden 79,400 862,000
First Union Real Estate Equity & Mtg. Investments, SBI ................... United States 69,000 405,375
LNR Property Corp. ....................................................... United States 38,200 761,613
LNR Property Corp., B .................................................... United States 39,000 777,563
Security Capital European Realty ......................................... United States 11,745 234,900
(a)Security Capital US Realty, A ........................................... Luxembourg 79,800 790,020
Starwood Hotels & Resorts Trust .......................................... United States 26,500 601,219
-----------
4,916,067
-----------
TELECOMMUNICATIONS 2.9%
(a)Embratel Participacoes SA ............................................... Brazil 18,770,000 163,116
(a)Tele Celular Sul Participacoes SA ....................................... Brazil 18,952,000 17,568
(a)Tele Centro Oeste Celular Participacoes SA .............................. Brazil 18,770,000 14,758
(a)Tele Centro Sul Participacoes SA ........................................ Brazil 19,906,100 131,801
(a)Tele Norte Leste Participacoes SA, ADR .................................. Brazil 19,655,300 161,049
(a) Tele Sudeste Celular Participacoes SA .................................. Brazil 18,770,000 52,819
Telecom Italia SpA ....................................................... Italy 199,700 1,703,868
Telecom Italia SpA, di Risp .............................................. Italy 159,000 999,257
(a)Tele-Communications Inc., A ............................................. United States 28,400 1,570,875
(a)Telemig Celular Participacoes SA ........................................ Brazil 18,770,000 13,205
Telephone & Data Systems Inc. ............................................ United States 31,000 1,393,063
(a)Telesp Celular Participacoes SA ......................................... Brazil 18,770,000 80,781
(a)Telesp Participacoes SA ................................................. Brazil 17,843,900 228,910
-----------
6,531,070
-----------
TRANSPORTATION 2.8%
ASG AB, B ................................................................ Sweden 27,900 528,344
BTL AB, B ................................................................ Sweden 319,500 1,261,319
Florida East Coast Industries Inc. ....................................... United States 26,200 921,913
Golden Ocean Group Ltd., wts., 8/31/01 ................................... United States 615 --
Railtrack Group Plc. ..................................................... United Kingdom 136,576 3,572,040
Smit Internationale NV ................................................... Netherlands 1,183 26,034
-----------
6,309,650
-----------
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
UTILITIES ELECTRICAL & GAS .6%
(a)Citizens Utilities Co., B ............................................. United States 168,512 $ 1,369,160
VEBA AG ................................................................ Germany 200 11,852
------------
1,381,012
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $175,271,239) 179,168,327
============
PREFERRED STOCKS .8%
(a)Embratel Participacoes SA, ADR, pfd. .................................. Brazil 21,400 298,262
(a)Tele Celular Sul Participacoes SA, ADR, pfd. .......................... Brazil 2,140 37,316
(a)Tele Centro Oeste Celular Participacoes SA, ADR, pfd. ................. Brazil 7,126 20,933
(a)Tele Centro Sul Participacoes SA, ADR, pfd. ........................... Brazil 8,280 346,207
(a)Tele Norte Leste Participacoes SA, ADR, pfd. .......................... Brazil 36,000 447,750
(a)Tele Sudeste Celular Participacoes SA, ADR, pfd. ...................... Brazil 4,280 88,542
(a)Telemig Celular Participacoes SA, ADR, pfd. ........................... Brazil 1,070 22,738
(a)Telesp Celular Participacoes SA, ADR, pfd. ............................ Brazil 8,560 149,800
(a)Telesp Participacoes SA, ADR, pfd. .................................... Brazil 19,700 435,863
------------
TOTAL PREFERRED STOCKS (COST $2,512,751) 1,847,411
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-------
BONDS 1.6%
Compania Siderurgica De Guadalajara SA De CV:
<S> <C> <C> <C>
10.50%, 11/15/07 .................................................... Mexico $ 70,000 38,500
144A,10.50%, 11/15/07 ............................................... Mexico 40,000 22,000
Eurotunnel Finance Ltd.:
Equity Note 12/31/03 ................................................ United Kingdom 188,008 GBP 90,712
Participating Loan Note 4/30/40 ..................................... United Kingdom 90,000 GBP 49,414
Eurotunnel Plc.:
12/31/12, Tier 1 .................................................... United Kingdom 269,214 GBP 376,241
12/31/18, Tier 2 .................................................... United Kingdom 311,578 GBP 404,344
12/31/25, Tier 3 .................................................... United Kingdom 160,000 GBP 177,024
12/31/50, Resettable Advance R5 ..................................... United Kingdom 202,650 GBP 124,749
Stabilization Advance S8 Tier 1 ..................................... United Kingdom 34,736 GBP 10,114
Stabilization Advance S8 Tier 2 ..................................... United Kingdom 21,269 GBP 4,954
Eurotunnel SA:
12/31/18, Tier 2 (Libor) ............................................ France 678,266 FRF 94,706
12/31/18, Tier 2 (Pibor) ............................................ France 121,735 FRF 16,998
Fine Host Corp., 144A, 5.00%, 11/01/04 ................................. United States 910,000 700,700
Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01 ......................... United States 570,000 159,600
MCII Holdings, 0/12.00%, 11/15/02 ...................................... United States 100,000 83,000
Security Capital US Realty, 2.00%, 5/22/03 ............................. Luxembourg 586,000 462,940
Southwest Royalties Inc., B, 10.50%, 10/15/04 .......................... United States 460,000 186,300
TFM SA de CV
144A, 10.25%, 6/15/07 ............................................... Mexico 250,000 212,500
144A, zero cpn. to 6/15/02, 11.75% thereafter, 6/15/09 .............. Mexico 450,000 234,000
Tribasa Toll Road Trust I, 144A, 10.50%, 12/01/11 ...................... Mexico 187,526 113,922
------------
TOTAL BONDS (COST $4,105,836) 3,562,718
------------
BONDS & NOTES IN REORGANIZATION 1.5%
(a)Alpargatas SA Industrial y Comercial:
11.75%, 8/18/98 ..................................................... Argentina 150,000 24,000
9.00%, 2/20/99 ...................................................... Argentina 320,000 48,000
Bank Claim .......................................................... Argentina 425,000 63,750
(a)Banque Pallas Stern, 3/24/00 .......................................... France 1,410,000 FRF 153,969
(a)Brunos Inc., Bank Claim:
Revolver Commitment .................................................. United States 84,000 54,600
Tranche A ............................................................ United States 138,000 89,700
Tranche B ............................................................ United States 85,000 55,250
</TABLE>
99
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL DISCOVERY SECURITIES FUND COUNTRY AMOUNT* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
(a)Buenos Aires Embotelladora SA:
8.50%, 12/29/00, ...................................................... Argentina $ 50,000 $ 21,000
144A, 8.50%, 12/29/00 ................................................. Argentina 84,000 35,280
Bank Claim ............................................................ Argentina 1,853,634 704,381
(a)Credit Leasing, Bank Claim .............................................. Japan 45,482,299 JPY 64,010
(a)Dow Corning Corp., 9.375%, 2/20/99 ...................................... United States 300,000 393,000
(a)Koninklijke Nederlandse Vliegtuigenfabriek Fokke, Trade Claim ........... Netherlands 950,000 NLG 384,718
Mercury Finance Co., Bank Claim, MTN:
8.15%, 5/14/97 ........................................................ United States 220,873 198,786
7.33%, 6/29/99 ........................................................ United States 126,874 114,187
7.42%, 6/29/00 ........................................................ United States 154,676 139,208
Mercury Finance Co., Commercial Paper:
1/31/97 ............................................................... United States 40,471 36,424
2/07/97 ............................................................... United States 6,810 6,129
2/11/97 ............................................................... United States 229,914 206,923
2/18/97 ............................................................... United States 500,847 450,762
2/20/97 ............................................................... United States 7,495 6,745
3/17/97 ............................................................... United States 19,622 17,659
4/11/97 ............................................................... United States 4,285 3,857
4/18/97 ............................................................... United States 12,001 10,801
4/22/97 ............................................................... United States 6,857 6,171
4/24/97 ............................................................... United States 10,285 9,257
6/29/98 ............................................................... United States 55,529 49,976
4/05/01 ............................................................... United States 60,265 54,239
(a)Nippon Credit Bank Ltd., Bank Claim ..................................... Japan 23,138,740 JPY 32,776
(a) Nippon Total Finance, Bank Claim ....................................... Japan 21,981,960 JPY 11,593
-----------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $4,583,023) 3,447,151
-----------
TOTAL LONG TERM INVESTMENTS (COST $186,472,849) 188,025,607
-----------
(d)SHORT TERM INVESTMENTS 12.1%
Fannie Mae, 4.45% to 5.37%, with maturities to 6/30/99 ................... United States 20,600,000 20,303,134
Federal Home Loan Bank, 4.62% to 4.68% with maturities to 6/21/99 ........ United States 4,500,000 4,415,202
Federal Home Loan Mortgage Corp., 4.96%, 3/29/99 ......................... United States 2,500,000 2,469,715
-----------
TOTAL SHORT TERM INVESTMENTS (COST $27,187,686) 27,188,051
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $213,660,535) 215,213,658
-----------
(g)REPURCHASE AGREEMENT (COST 2,300,000) 1.0%
Bank of New York Co. Inc., 4.25%, 1/04/99 (Maturity Value $2,300,272)
Collateralized by U.S. Treasury Notes & Bonds ........................... United States 2,300,000 2,300,000
-----------
TOTAL INVESTMENTS (COST $215,960,535) 96.8% .............................. 217,513,658
SECURITIES SOLD SHORT (4.1%) ............................................. (9,311,593)
OPTIONS WRITTEN .......................................................... (113)
NET EQUITY IN FORWARD CONTRACTS (.5%) .................................... (1,003,049)
OTHER ASSETS, LESS LIABILITIES 7.8% ...................................... 17,457,274
-----------
TOTAL NET ASSETS 100.0% $224,656,177
============
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL DISCOVERY SECURITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD SHORT
American International Group Inc. ....................................... United States 11,300 $1,091,862
AT&T Corp. .............................................................. United States 22,500 1,693,125
(a)Cap Gemini SA .......................................................... France 14,150 2,272,126
Carrefour Supermarche SA ................................................ France 1,528 1,154,028
(a) DST Systems Inc. ...................................................... United States 21,000 1,198,312
Edison SpA .............................................................. Italy 47,900 564,769
Newell Co. .............................................................. United States 8,550 352,687
Suntrust Banks Inc. ..................................................... United States 3,000 229,500
Telecom Italia Mobile SpA ............................................... Italy 100,800 745,971
(a) Tele-Communications Inc., Liberty Media Group, A ...................... United States 200 9,213
----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $7,799,126) $9,311,593
==========
OPTIONS WRITTEN COUNTRY CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
Bankers Trust Corp., January/90/Call (PREMIUMS RECEIVED $1,346) ......... United States 9 $ 113
----------
</TABLE>
See currency abbreviations on page 162.
*Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income Producing.
(c)See Note 8 regarding restricted securities.
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
(g)See Note 1(c) regarding repurchase agreements.
101
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<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 78.9%
AEROSPACE & MILITARY TECHNOLOGY 1.5%
(a)Coltec Industries Inc. ............. United States 153,800 $ 2,999,100
General Motors Corp., H ............ United States 12,000 476,250
(a)Hexcel Corp. ....................... United States 42,000 351,750
Lockheed Martin Corp. .............. United States 14,400 1,220,400
Northrop Grumman Corp. ............. United States 28,700 2,098,688
-----------
7,146,188
-----------
APPLIANCES & HOUSEHOLD DURABLES .5%
Premark International Inc. ......... United States 66,200 2,292,175
-----------
AUTOMOBILES 2.4%
Borg-Warner Automotive Inc. ........ United States 52,900 2,952,481
(a)General Motors Corp. ............... United States 118,300 8,465,844
Volvo AB, B ........................ Sweden 4,300 98,670
-----------
11,516,995
-----------
BANKING 7.8%
Bank One Corp. ..................... United States 176,800 9,027,850
Bankamerica Corp. .................. United States 24,478 1,471,740
Chase Manhattan Corp. .............. United States 260,200 17,709,862
Crestar Financial Corp. ............ United States 4,900 352,800
First Union Corp. .................. United States 123,882 7,533,574
National City Corp. ................ United States 24,500 1,776,250
-----------
37,872,076
-----------
BEVERAGES & TOBACCO 4.7%
Heineken Holding NV, A ............. Netherlands 41,950 2,011,776
Philip Morris Cos. Inc. ............ United States 130,000 6,955,000
RJR Nabisco Holdings Corp. ......... United States 281,700 8,362,969
UST Inc. ........................... United States 157,500 5,492,813
-----------
22,822,558
-----------
BROADCASTING & PUBLISHING 6.3%
Central Newspapers Inc., A ......... United States 59,200 4,229,100
Daily Mail & General Trust Plc., A . United Kingdom 25,300 1,194,599
Dow Jones & Co. Inc. ............... United States 76,500 3,681,562
(a)Mediaone Group Inc. ................ United States 197,600 9,287,200
Readers Digest Association Inc., A . United States 37,600 947,050
Scripps Co., A ..................... United States 82,000 4,079,500
United News & Media Plc ............ United Kingdom 182,768 1,582,743
Washington Post Co., B ............. United States 9,000 5,201,438
-----------
30,203,192
-----------
BUILDING MATERIALS & COMPONENTS .8%
(a)American Standard Cos. Inc. ........ United States 110,900 3,992,400
-----------
BUSINESS & PUBLIC SERVICES 2.2%
(a)Healthsouth Corp. .................. United States 201,200 3,106,025
Suez Lyonnaise des Eaux SA ......... France 37,200 7,644,839
-----------
10,750,864
-----------
CHEMICALS 2.2%
(a)Cytec Industries Inc. .............. United States 92,600 1,967,750
Morton International Inc. .......... United States 213,600 5,233,200
Olin Corp. ......................... United States 114,000 3,227,625
-----------
10,428,575
-----------
ELECTRICAL & ELECTRONICS .9%
Philips Electronics NV ............. Netherlands 30,000 2,030,625
(a)Wang Laboratories Inc., A .......... United States 85,900 2,383,725
-----------
4,414,350
-----------
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY EQUIPMENT & SERVICES 2.2%
Baker Hughes Inc. .................. United States 162,500 $ 2,874,219
(a)Cooper Cameron Corp. ............... United States 112,700 2,761,150
(a)Seacor Smit Inc. ................... United States 20,000 988,750
Transocean Offshore Inc. ........... United States 76,300 2,045,794
(a)Weatherford International Inc. ..... United States 94,250 1,826,094
-----------
10,496,007
-----------
ENERGY SOURCES 2.7%
Amoco Corp. ........................ United States 9,000 543,375
(a)Conoco Inc., A ..................... United States 50,000 1,043,750
(a)Ocean Energy Inc. .................. United States 205,000 1,294,063
Shell Transport & Trading Co. Plc .. United Kingdom 553,300 3,387,645
(a)Smith International Inc. ........... United States 24,200 609,538
Societe Elf Aquitaine SA, Br ....... France 51,500 5,955,569
-----------
12,833,940
-----------
FINANCIAL SERVICES 9.8%
Bankers Trust Corp. ................ United States 9,800 837,287
Bear Stearns Co. Inc. .............. United States 100,300 3,748,712
CIT Group Inc., A .................. United States 75,000 2,385,937
Corporacion Financiera Alba SA ..... Spain 8,400 1,404,984
Finova Group Inc. .................. United States 37,300 2,011,869
Greenpoint Financial Corp. ......... United States 94,600 3,322,825
Household International Inc. ....... United States 168,030 6,658,189
(a)Ifil Finanziaria Partecipazioni SpA Italy 348,900 971,622
(c)Laser Mortgage Management Inc. ..... United States 215,000 1,169,062
Lehman Brothers Holdings Inc. ...... United States 91,400 4,027,312
Morgan Stanley Dean Witter & Co. ... United States 133,600 9,485,600
Sunamerica Inc. .................... United States 28,500 2,312,063
United Asset Management Corp. ...... United States 362,000 9,412,000
-----------
47,747,462
-----------
FOOD & HOUSEHOLD PRODUCTS 1.5%
(a)Rubbermaid Inc. .................... United States 16,200 509,288
U.S. Industries Inc. ............... United States 201,700 3,756,663
Van Melle NV ....................... Netherlands 44,997 3,045,036
-----------
7,310,987
-----------
FOREST PRODUCTS & PAPER 1.4%
Bowater Inc. ....................... United States 7,200 298,350
Greif Brothers Corp., A ............ United States 1,800 52,537
Rayonier Inc. ...................... United States 107,400 4,933,688
(a)Smurfit-Stone Container Corp. ...... United States 3,170 --
St. Joe Co. ........................ United States 57,000 1,335,938
-----------
6,620,513
-----------
HEALTH & PERSONAL CARE 2.4%
(a)Beverly Enterprises Inc. ........... United States 60,000 405,000
(a)Foundation Health Systems, A ....... United States 172,170 2,055,279
(a)Pacificare Health Systems Inc., A .. United States 35,000 2,546,250
(a)Pacificare Health Systems Inc., B .. United States 19,400 1,542,300
(a)Tenet Healthcare Corp. ............. United States 100,000 2,625,000
Ventas Inc. ........................ United States 205,600 2,505,750
-----------
11,679,579
-----------
INDUSTRIAL COMPONENTS 3.5%
Aeroquip Vickers Inc. .............. United States 54,700 1,637,581
BTR Plc ............................ United Kingdom 801,000 1,639,181
Charter Plc ........................ United Kingdom 179,966 976,107
</TABLE>
103
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL COMPONENTS (CONT.)
(a)Lear Corp. ....................................... United States 122,100 $ 4,700,850
Lucas Varity Plc ................................. United Kingdom 1,236,819 4,074,373
Lucas Varity Plc., ADR ........................... United Kingdom 36,500 1,222,750
(a)Owens-Illinois Inc. .............................. United States 87,800 2,688,875
-----------
16,939,717
-----------
INSURANCE 3.0%
(a)Alleghany Corp. .................................. United States 13,085 2,458,344
Allmerica Financial Corp. ........................ United States 3,400 196,775
AON Corp. ........................................ United States 14,900 825,087
Argonaut Group Inc. .............................. United States 12,589 308,430
Fund American Enterprises Holdings Inc. .......... United States 25,000 3,501,562
Hartford Financial Services Group Inc. ........... United States 38,100 2,090,737
Provident Companies Inc. ......................... United States 8,500 352,750
Sampo Insurance Co. Plc., A ...................... Finland 46,300 1,764,802
Torchmark Corp. .................................. United States 79,900 2,821,469
-----------
14,319,956
-----------
LEISURE & TOURISM 1.8%
Hilton Hotels Corp. .............................. United States 252,500 4,829,062
(a)Promus Hotel Corp. ............................... United States 116,600 3,774,925
-----------
8,603,987
-----------
MACHINERY & ENGINEERING .6%
New Holland NV ................................... Netherlands 98,800 1,352,325
Siebe Plc ........................................ United Kingdom 410,800 1,612,991
-----------
2,965,316
-----------
MERCHANDISING 1.9%
(a)Federated Department Stores Inc. ................. United States 78,100 3,402,231
(a)Payless Shoesource Inc. .......................... United States 48,300 2,288,213
(a)Toys R Us Inc. ................................... United States 200,670 3,386,306
-----------
9,076,750
-----------
METALS & MINING .3%
Allegheny Teledyne Inc. .......................... United States 84,580 1,728,604
-----------
MULTI-INDUSTRY 6.4%
(a)Berkshire-Hathaway Inc., A ....................... United States 50 3,500,000
CGIP-Compagnie Generale Industrie de Participation France 42,210 2,327,285
Cie Financiere Richemont AG, Br., A .............. Switzerland 2,330 3,294,401
Edperbrascan Corp., A ............................ Canada 120,000 1,664,062
Investor AB, A ................................... Sweden 173,240 7,715,419
Investor AB, B ................................... Sweden 171,800 7,757,260
Kansas City Southern Industries Inc. ............. United States 58,000 2,852,875
Lagardere SCA .................................... France 40,462 1,720,262
-----------
30,831,564
-----------
REAL ESTATE 1.4%
(a)Alexander's Inc. ................................. United States 8,000 625,500
(a)Cadillac Fairview Corp. .......................... Canada 80,000 1,471,354
(a,c)Security Capital European Realty ................. United States 23,055 461,100
Starwood Hotels & Resorts Trust .................. United States 181,200 4,110,975
-----------
6,668,929
-----------
TELECOMMUNICATIONS 7.3%
(a)Embratel Participacoes SA ........................ Brazil 46,280,000 402,185
Media General Inc., A ............................ United States 35,200 1,865,600
(a)Tele Celular Sul Participacoes SA ................ Brazil 46,666,000 43,258
(a)Tele Centro Oeste Celular Participacoes SA ....... Brazil 46,280,000 36,388
</TABLE>
104
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
(a)Tele Centro Sul Participacoes SA .................... Brazil 49,081,400 $ 324,975
(a)Tele Norte Leste Participacoes SA ................... Brazil 48,157,700 394,588
(a)Tele Sudeste Celular Participacoes SA ............... Brazil 46,280,000 130,231
Telecom Italia SpA .................................. Italy 409,800 3,496,470
Telecom Italia SpA, di Risp ......................... Italy 354,600 2,228,532
(a)Telecommunications Inc.- TCI Ventures Group, A ...... United States 271,600 6,399,575
(a)Tele-Communications Inc., A ......................... United States 141,500 7,826,719
(a)Telemig Celular Participacoes SA .................... Brazil 46,280,000 32,558
Telephone & Data Systems Inc. ....................... United States 153,700 6,906,894
(a)Telesp Celular Participacoes SA ..................... Brazil 46,280,000 199,177
(a)Telesp Participacoes SA ............................. Brazil 43,964,400 563,996
(a)US Cellular Corp. ................................... United States 115,000 4,370,000
------------
35,221,146
------------
TEXTILES & APPAREL .5%
Liz Claiborne Inc. .................................. United States 74,200 2,341,938
------------
TRANSPORTATION 2.5%
Burlington Northern Santa Fe Corp. .................. United States 71,000 2,396,250
Florida East Coast Industries Inc. .................. United States 90,000 3,166,875
(a,c)Golden Ocean Group Ltd., wts., 8/31/01 .............. United States 1,120 --
Railtrack Group Plc ................................. United Kingdom 219,152 5,731,752
Xtra Corp. .......................................... United States 13,800 570,975
------------
11,865,852
------------
UTILITIES ELECTRICAL & GAS .4%
(a)Calenergy Co. Inc. .................................. United States 63,100 2,188,781
VEBA AG ............................................. Germany 400 23,703
------------
2,212,484
------------
TOTAL COMMON STOCKS (COST $356,657,317) ............. 380,904,104
------------
PREFERRED STOCKS .9%
Apartment Investment & Management Co., cvt., pfd .... United States 26,855 993,635
(a)Embratel Participacoes SA, ADR, pfd ................. Brazil 38,850 541,472
(a)Tele Celular Sul Participacoes SA, ADR, pfd ......... Brazil 3,885 67,745
(a)Tele Centro Oeste Celular Participacoes SA, ADR, pfd Brazil 12,937 38,002
(a)Tele Centro Sul Participacoes SA, ADR, pfd .......... Brazil 16,970 709,558
(a)Tele Norte Leste Participacoes SA, ADR, pfd ......... Brazil 65,650 816,522
(a)Tele Sudeste Celular Participacoes SA, ADR, pfd ..... Brazil 7,770 160,742
(a)Telemig Celular Participacoes SA, ADR, pfd .......... Brazil 1,942 41,267
(a)Telesp Celular Participacoes SA, ADR, pfd ........... Brazil 15,540 271,950
(a)Telesp Participacoes SA, ADR, pfd ................... Brazil 35,750 790,969
------------
TOTAL PREFERRED STOCKS (COST $5,990,168) ............ 4,431,862
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 3.0%
Abraxas Petroleum Corp., 11.50%, 11/01/04 ........... United States $ 80,000 60,800
Eurotunnel Finance Ltd.:
Equity Note 12/31/03 ............................. United Kingdom 481,602 GBP 232,368
Participating Loan Note 4/30/40 .................. United Kingdom 220,000 GBP 120,789
Eurotunnel Plc.:
12/31/12, Tier 1 ................................. United Kingdom 537,877 GBP 751,712
12/31/18, Tier 2 ................................. United Kingdom 613,800 GBP 796,546
12/31/25, Tier 3 ................................. United Kingdom 285,008 GBP 315,332
12/31/50, Resettable Advance R5 .................. United Kingdom 408,583 GBP 251,519
Stabilization Advance S8 Tier 1 .................. United Kingdom 70,825 GBP 20,621
Stabilization Advance S8 Tier 2 .................. United Kingdom 43,325 GBP 10,092
</TABLE>
105
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL SHARES SECURITIES FUND COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Eurotunnel SA:
12/31/12, Tier 1 (Libor) .......................... France $ 1,302,207 FRF $ 195,814
12/31/12, Tier 1, (Pibor) ......................... France 303,200 FRF 45,592
12/31/18, Tier 2 (Libor) .......................... France 3,094,027 FRF 432,018
12/31/18, Tier 2, (Pibor) ......................... France 675,534 FRF 94,325
12/31/25, Tier 3 (Libor) .......................... France 2,441,156 FRF 288,418
12/31/25, Tier 3 (Pibor) .......................... France 1,062,791 FRF 125,567
12/31/50, Resettable Advance R4 ................... France 1,873,514 FRF 120,738
Stabilization Advance S6 Tier 1 (Pibor) ........... France 73,006 FRF 2,287
Stabilization Advance S7 Tier 1 (Libor) ........... France 73,985 FRF 2,318
Stabilization Advance S6 Tier 2 ................... France 101,090 FRF 2,533
Fine Host Corp., cvt., 144A, 5.00%, 11/01/04 ......... United States 2,535,000 1,951,950
Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01 ....... United States 1,050,000 294,000
Hechinger Co., 6.95%, 10/15/03 ....................... United States 1,622,000 1,046,190
HIH Capital Ltd., cvt., 7.50%, 9/25/06 ............... United Kingdom 1,235,000 778,050
Kelly Oil & Gas Company:
10.375%, 10/15/06 ................................. United States 330,000 245,850
Series D, 10.375%, 10/15/06 ....................... United States 220,000 163,900
Korea Electric Power Corp.:
6.375%, 12/01/03 .................................. South Korea 57,000 48,592
6.75%, 8/01/27 .................................... South Korea 500,000 417,500
MCII Holdings, 0/12.00%, 11/15/02 .................... United States 175,000 145,250
Pratama Datakom Asia BV:
Reg S, 12.75%, 7/15/05 ............................ Indonesia 140,000 34,650
144A, 12.75%, 7/15/05 ............................. Indonesia 665,000 164,587
Roil Limited, 144A, 12.779%, 12/05/02 ................ Cayman Islands 2,610,000 809,100
Security Capital US Realty, cvt., 144A, 2.00%, 5/22/03 Luxembourg 3,372,000 2,663,880
Southwest Royalties Inc., B, 10.50%, 10/15/04 ........ United States 835,000 338,175
Specialty Foods Corp., B, 11.25%, 8/15/03 ............ United States 1,375,000 687,500
TFM SA DE CV:
144A, 10.25%, 6/15/07 ............................. Mexico 250,000 212,500
144A, zero coupon to 6/15/02, 11.75%, 6/15/09 ..... Mexico 885,000 460,200
Tribasa Toll Road Trust I, 10.50%, 12/01/11 .......... Mexico 168,773 102,530
-----------
TOTAL CORPORATE BONDS AND NOTES (COST $17,757,547) ... 14,433,793
-----------
BONDS & NOTES IN REORGANIZATION 1.8%
(a)Alpargatas SA Industrial Y Comercial:
Bank Claim ........................................ Argentina 820,000 123,000
11.75%, 8/18/98 ................................... Argentina 290,000 46,400
9.00%, 2/20/99 .................................... Argentina 610,000 91,500
(a)American Pad & Paper Co., Bank Claim ................. United States 263,200 239,512
(a)APS Inc., Bank Claim ................................. United States 172,732 76,002
(a)Barney's Inc.:
7.18%, 6/15/00 .................................... United States 2,500,000 237,500
8.32%, 6/15/00 .................................... United States 1,000,000 95,000
(a)Brunos Inc., Bank Claim:
Revolver Committment .............................. United States 160,000 104,000
Tranche A ......................................... United States 285,000 185,250
Tranche B ......................................... United States 175,000 113,750
(a)Credit Leasing, Bank Claim ........................... Japan 95,962,673 JPY 135,054
(a)Dictaphone Corporation, Bank Claim:
2/20/99 ........................................... United States 218,000 194,020
9/10/99 ........................................... United States 81,000 70,875
(a)Dow Corning Corp.:
9.375%, 2/01/08 ................................... United States 550,000 720,500
Bank Debt #1 ...................................... United States 100,000 131,000
(a)FPA Medical Management Inc.:
Bank Claim ........................................ United States 110,000 10,450
Term Loan ......................................... United States 130,100 12,360
</TABLE>
106
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL SHARES SECURITIES FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
(a)Koninklijke Ned Vlieg Fokker NV, Trade Claim .............................. Netherlands $ 520,000 NLG $ 210,582
Mercury Finance Co.; Bank Claim, MTN:
8.15%, 5/14/97 ......................................................... United States 425,163 382,646
7.33%, 6/29/99 ......................................................... United States 71,884 64,695
7.42%, 6/29/00 ......................................................... United States 257,793 232,014
Mercury Finance Co., Commercial Paper:
2/04/97 ................................................................ United States 17,026 15,323
2/11/97 ................................................................ United States 365,899 329,309
2/18/97 ................................................................ United States 773,419 696,077
2/20/97 ................................................................ United States 13,627 12,264
3/17/97 ................................................................ United States 35,839 32,255
4/11/97 ................................................................ United States 8,572 7,715
4/16/97 ................................................................ United States 691,786 622,607
4/18/97 ................................................................ United States 24,001 21,601
4/22/97 ................................................................ United States 13,714 12,342
4/24/97 ................................................................ United States 20,571 18,513
2/20/99 ................................................................ United States 80,943 72,848
6/29/99 ................................................................ United States 31,462 28,315
4/05/01 ................................................................ United States 34,145 30,730
(a)Nippon Credit Bank Ltd., Bank Claim ....................................... Japan 48,820,209 JPY 69,155
(a)Nippon Total Finance, Bank Claim .......................................... Japan 46,379,531 JPY 24,459
(a)Peregrine Investments Holdings Ltd., zero cpn., 2/28/99 ................... Hong Kong 5,000,000 JPY 3,989
(a)PIV Investment Finance (Cayman) Ltd., 2/20/99 ............................. Hong Kong 12,060,000 2,592,900
(a)Ritvik Holdings:
Bank Claim ............................................................. United States 137,000 109,600
Bank Claim, Term Loan B ................................................ United States 55,000 44,000
(a)Ventas Inc., Bank Claim, Tranche D ........................................ United States 248,000 235,600
-------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $8,696,314) ................... 8,455,712
-------------
TOTAL LONG TERM INVESTMENTS (COST $389,101,346) ........................... 408,225,471
-------------
(d)SHORT TERM INVESTMENTS 15.0%
Fannie Mae, 4.45% to 5.37% with maturities to 6/30/99 ..................... United States 55,865,000 55,239,866
Federal Home Loan Bank, 4.62% to 5.37% with maturities to 6/21/99 ......... United States 13,500,000 13,358,267
Federal Home Loan Mortgage Corp., 4.93% to 5.10% with maturities to 3/22/99 United States 4,000,000 3,967,539
-------------
TOTAL SHORT TERM INVESTMENTS (COST $72,549,860) ........................... 72,565,672
-------------
TOTAL INVESTMENTS (COST $461,651,206) 99.6% ............................... 480,791,143
SECURITIES SOLD SHORT (3.7%) .............................................. (17,992,108)
OPTIONS WRITTEN ........................................................... (150)
NET EQUITY IN FORWARD CONTRACTS ........................................... (46,462)
OTHER ASSETS, LESS LIABILITIES 4.1% ....................................... 19,691,264
-------------
TOTAL NET ASSETS 100.0% ................................................... $ 482,443,687
-------------
</TABLE>
107
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD SHORT
American International Group Inc. ............................ United States 24,700 $ 2,386,637
Apartment Investment & Management Co. ........................ United States 12,600 468,562
AT&T Corp. ................................................... United States 109,200 8,217,300
BP Amoco Plc., ADR ........................................... United Kingdom 1,900 180,500
(a)Cap Gemini SA ................................................ France 7,100 1,140,077
Carrefour Supermarche SA ..................................... France 675 509,796
(a)DST Systems Inc. ............................................. United States 6,300 359,494
Newell Co. ................................................... United States 12,750 525,938
Suntrust Banks Inc. .......................................... United States 4,800 367,200
Telecom Italia Mobile SpA .................................... Italy 270,700 2,003,316
(a)Tele-Communications Inc., Liberty Media Group, A ............. United States 39,800 1,833,288
----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $15,319,353) ........... 17,992,108
----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WRITTEN COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bankers Trust Corp., January/90/Call (PREMIUM RECEIVED $1,795) United States 12 $ 150
-----------
</TABLE>
See currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income Producing.
(c)See Note 8 regarding restricted securities.
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
See notes to financial statements.
108
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
NATURAL RESOURCES SECURITIES FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 91.9%
ENERGY MINERALS 27.4%
Atlantic Richfield Co. .................. United States 13,900 $ 906,975
(a)Barrett Resources Corp. ................. United States 73,300 1,759,200
(a)Basin Exploration Inc. .................. United States 53,600 673,350
Chesapeake Energy Corp. ................. United States 210,000 183,750
(a)Conoco Inc., A .......................... United States 20,000 417,500
Enron Oil & Gas Co. ..................... United States 72,500 1,250,625
(a)Gulf Canada Resources Ltd. .............. Canada 190,200 558,713
Mobil Corp. ............................. United States 2,500 217,813
(a)Newfield Exploration Co. ................ United States 66,000 1,377,750
(a)Nuevo Energy Co. ........................ United States 54,500 626,750
Royal Dutch Petroleum Co., N.Y. shs., ADR Netherlands 23,000 1,101,125
Texaco Inc. ............................. United States 20,800 1,099,800
Tosco Corp. ............................. United States 20,000 517,500
Ultramar Diamond Shamrock Corp. ......... United States 17,000 412,250
Unocal Corp. ............................ United States 22,000 642,125
YPF SA, ADR ............................. Argentina 30,000 838,125
-----------
12,583,351
-----------
FINANCE 7.4%
Alexandria Real Estate Equities Inc. .... United States 21,800 674,438
Glenborough Realty Trust Inc. ........... United States 34,400 700,900
(a)Security Capital Group Inc., B .......... United States 51,500 698,469
Starwood Hotels & Resorts ............... United States 30,000 680,625
(a)United Rentals Inc. ..................... United States 18,800 622,750
-----------
3,377,182
-----------
INDUSTRIAL SERVICES 15.9%
(a)AES Corp. ............................... United States 32,200 1,525,475
(a)Atwood Oceanics Inc. .................... United States 24,000 408,000
(a)Cal Dive International Inc. ............. United States 39,800 825,850
(a)Casella Waste Systems Inc., A ........... United States 12,600 467,775
Diamond Offshore Drilling Inc. .......... United States 23,000 544,813
Halliburton Co. ......................... United States 19,000 562,875
(a)Marine Drilling Cos. Inc. ............... United States 36,000 276,750
Schlumberger Ltd. ....................... United States 17,000 784,125
Transocean Offshore Inc. ................ United States 26,000 697,125
(a)Tuboscope Inc. .......................... United States 54,000 438,750
(a)Varco International Inc. ................ United States 102,000 790,500
-----------
7,322,038
-----------
NON-ENERGY MINERALS 17.9%
Aluminum Co. of America ................. United States 7,100 529,394
Barrick Gold Corp. ...................... Canada 40,195 783,803
Canyon Resources Corp., wts., 3/20/99 ... United States 105,000 --
Carpenter Technology Corp. .............. United States 4,400 149,325
De Beers Consolidated Mines AG, ADR ..... South Africa 71,800 915,450
Franco-Nevada Mining Corp. Ltd. ......... Canada 42,400 810,182
(a)Freeport-McMoRan Copper & Gold Inc., A .. United States 13,718 132,893
Newmont Mining Corp. .................... United States 30,955 559,125
Nucor Corp. ............................. United States 11,200 484,400
Phelps Dodge Corp. ...................... United States 8,300 422,263
Pohang Iron & Steel Co. Ltd., ADR ....... South Korea 35,600 600,750
Potash Corp. of Saskatchewan Inc. ....... Canada 11,100 709,013
Rio Tinto, PLC .......................... United Kingdom 68,429 794,667
(a)Stillwater Mining Co., 144A ............. United States 48,450 1,324,300
-----------
8,215,565
-----------
</TABLE>
109
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
NATURAL RESOURCES SECURITIES FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
PROCESS INDUSTRIES 11.5%
(a)Asia Pulp & Paper Co. Ltd. ADR ......................................... Indonesia 75,000 $ 614,063
Bemis Co. Inc. ......................................................... United States 3,500 132,781
Bowater Inc. ........................................................... United States 9,000 372,938
E. I. du Pont de Nemours and Co. ....................................... United States 5,000 265,313
Monsanto Co. ........................................................... United States 5,900 280,250
(a)Owens-Illinois Inc. .................................................... United States 27,100 829,938
Praxair Inc. ........................................................... United States 24,100 849,525
Sigma-Aldrich Corp. .................................................... United States 29,600 869,500
(a)Smurfit-Stone Container Corp. .......................................... United States 43,100 681,519
Willamette Industries Inc. ............................................. United States 11,000 368,499
------------
5,264,326
------------
PRODUCER MANUFACTURING 4.2%
Avery Dennison Corp. ................................................... United States 16,500 743,531
(a)Weatherford Intl. Inc. ................................................. United States 60,400 1,170,250
------------
1,913,781
------------
UTILITIES 7.6%
Baltimore Gas and Electric Co. ......................................... United States 14,700 453,862
Enron Corp. ............................................................ United States 19,900 1,135,543
KN Energy Inc. ......................................................... United States 26,100 632,924
Montana Power Co. ...................................................... United States 5,100 288,468
Northwestern Corp. ..................................................... United States 19,700 520,818
Washington Gas Light Co. ............................................... United States 17,400 471,974
------------
3,503,589
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $52,441,663) .................... 42,179,832
------------
CONVERTIBLE PREFERRED STOCKS .8%
(a)Monsato Co., 6.50%, cvt. pfd. (COST $308,000) .......................... United States 7,700 377,300
------------
TOTAL LONG TERM INVESTMENTS (COST $52,749,663) ......................... 42,557,132
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C> <C>
(f)REPURCHASE AGREEMENT 7.6%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $3,491,091)
(COST $3,489,276) ..................................................... United States $ 3,489,276 3,489,276
Barclays Capital Inc. (Maturity Value $177,286)
Bear, Stearns & Co. Inc. (Maturity Value $45,963)
Chase Securities Inc. (Maturity Value $361,138)
CIBC Oppenheimer Corp. (Maturity Value $361,138)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $361,138)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $361,138)
Goldman, Sachs & Co. (Maturity Value $98,492)
Greenwich Capital Markets Inc. (Maturity Value $361,138)
Lehman Brothers Inc. (Maturity Value $65,660)
NationsBanc Montgomery Securities LLC (Maturity Value $361,138)
Paine Webber Inc. (Maturity Value $196,984)
Paribas Corp. (Maturity Value $361,138)
Warburg Dillon Read LLC (Maturity Value $378,740)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $56,238,939) 100.3% ............................ 46,046,408
OTHER ASSETS, LESS LIABILITIES (.3%) ................................... (119,362)
------------
NET ASSETS 100.0% ...................................................... $ 45,927,046
============
</TABLE>
(a)Non-income producing.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
110
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 97.1%
EQUITY REIT - APARTMENTS 14.8%
Archstone Communities Trust ................. 399,535 $ 8,090,584
Avalonbay Communities Inc. .................. 100,000 3,425,000
Camden Property Trust ....................... 239,773 6,234,098
Charles E. Smith Residential Realty Inc. .... 89,000 2,859,125
Equity Residential Properties Trust ......... 256,000 10,352,000
Gables Residential Trust .................... 70,000 1,623,125
Irvine Apartment Communities Inc. ........... 155,600 4,959,750
Post Properties Inc. ........................ 110,000 4,228,125
-----------
41,771,807
-----------
EQUITY REIT - DIVERSIFIED PROPERTY TYPE 14.8%
Colonial Properties Trust ................... 201,700 5,370,263
Crescent Real Estate Equities Co. ........... 127,650 2,935,950
Duke Realty Investments Inc. ................ 255,000 5,928,750
Glenborough Realty Trust Inc. ............... 385,000 7,844,375
Liberty Property Trust ...................... 290,000 7,141,250
Spieker Properties Inc. ..................... 200,000 6,925,000
Vornado Realty Trust ........................ 166,000 5,602,500
-----------
41,748,088
-----------
EQUITY REIT - HEALTH CARE 2.4%
Health Care Property Investors Inc. ......... 55,000 1,691,250
OMEGA Healthcare Investors Inc. ............. 168,000 5,071,500
-----------
6,762,750
-----------
EQUITY REIT - HOTELS 11.9%
FelCor Lodging Trust Inc. ................... 360,000 8,302,500
Innkeepers USA Trust ........................ 322,600 3,810,713
MeriStar Hospitality Corp. .................. 410,000 7,610,625
Patriot American Hospitality Inc. ........... 544,508 3,267,051
(a)Starwood Hotels & Resorts Worldwide Inc. .... 350,000 7,940,625
Winston Hotels Inc. ......................... 323,900 2,651,931
-----------
33,583,445
-----------
EQUITY REIT - INDUSTRIAL 4.1%
Cabot Industrial Trust ...................... 180,000 3,678,750
Meridian Industrial Trust Inc. .............. 237,000 5,569,500
ProLogis Trust .............................. 113,979 2,365,064
-----------
11,613,314
-----------
EQUITY REIT - OFFICE 18.1%
Alexandria Real Estate Equities Inc. ........ 221,000 6,837,188
Arden Realty Inc. ........................... 380,600 8,825,163
Brandywine Realty Trust ..................... 290,000 5,183,750
Equity Office Properties Trust .............. 396,008 9,504,192
Highwoods Properties Inc. ................... 180,000 4,635,000
Mack-Cali Realty Corp. ...................... 170,000 5,248,750
SL Green Realty Corp. ....................... 147,000 3,178,875
TriNet Corporate Realty Trust Inc. .......... 285,000 7,623,750
-----------
51,036,668
-----------
EQUITY REIT - RESIDENTIAL COMMUNITIES 3.2%
Manufactured Home Communities Inc. .......... 180,000 4,511,250
Sun Communities Inc. ........................ 130,000 4,525,625
-----------
9,036,875
-----------
EQUITY REIT - RETAIL - COMMUNITY CENTERS 7.2%
Burnham Pacific Properties Inc. ............. 267,600 3,227,925
Developers Diversified Realty Corp. ......... 23,000 408,250
</TABLE>
111
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
EQUITY REIT - RETAIL - COMMUNITY CENTERS (CONT.)
Kimco Realty Corp. ..................................................... 190,000 $ 7,540,625
(c)Pacific Retail Trust ................................................... 866,067 9,249,595
------------
20,426,395
------------
EQUITY REIT - RETAIL - REGIONAL MALLS 5.3%
Mills Corp. ............................................................ 102,800 2,043,150
Simon Property Group Inc. .............................................. 300,000 8,550,000
The Macerich Co. ....................................................... 170,000 4,356,250
------------
14,949,400
------------
EQUITY REIT - STORAGE 4.6%
Public Storage Inc. .................................................... 110,000 2,976,875
Storage Trust Realty ................................................... 331,000 7,737,125
Storage USA Inc. ....................................................... 67,200 2,171,400
------------
12,885,400
------------
DIVERSIFIED PROPERTY TYPE 5.2%
(a)Crescent Operating Inc. ................................................ 27,500 130,625
(a)Security Capital Group Inc. Class B .................................... 715,200 9,699,900
(a)Security Capital US Realty ............................................. 500,000 4,950,000
------------
14,780,525
------------
HOTELS 5.5%
(a,e)Candlewood Hotel Co. Inc. .............................................. 650,000 3,412,500
Crestline Capital Corp. ................................................ 57,000 833,625
(a)Host Marriott Corp. .................................................... 570,000 7,873,125
(a)MeriStar Hotels & Resorts Inc. ......................................... 350,000 918,750
(a)Prime Hospitality Corp. ................................................ 224,500 2,371,280
------------
15,409,280
------------
TOTAL LONG TERM INVESTMENTS (COST $257,934,343) ........................ 274,003,947
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 1.8%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $5,103,713)
(COST $5,101,060) .................................................... $ 5,101,060 5,101,060
Barclays Capital Inc. (Maturity Value $259,178)
Bear, Stearns & Co. Inc. (Maturity Value $67,194)
Chase Securities Inc. (Maturity Value $527,956)
CIBC Oppenheimer Corp. (Maturity Value $527,956)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $527,956)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $527,956)
Goldman, Sachs & Co. (Maturity Value $143,988)
Greenwich Capital Markets Inc. (Maturity Value $527,956)
Lehman Brothers Inc. (Maturity Value $95,992)
NationsBanc Montgomery Securities LLC (Maturity Value $527,956)
Paine Webber Inc. (Maturity Value $287,977)
Paribas Corp. (Maturity Value $527,956)
Warburg Dillon Read LLC (Maturity Value $553,692)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $263,035,403) 98.9% ............................ 279,105,007
------------
OTHER ASSETS, LESS LIABILITIES 1.1% .................................... 3,185,400
------------
NET ASSETS 100.0% ...................................................... $282,290,407
============
</TABLE>
(a)Non-income producing.
(c)See Note 8 regarding restricted securities.
(e)See Note 9 regarding Holding of 5% Voting Securities.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
112
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND SHARES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 97.5%
COMMERCIAL SERVICES 7.3%
Ennis Business Forms Inc. ........................ 390,600 $ 3,881,588
Reynolds and Reynolds Co., A ..................... 556,000 12,753,250
Standard Register Co. ............................ 421,400 13,037,061
Wallace Computer Services Inc. ................... 955,900 25,211,862
------------
54,883,761
------------
CONSUMER DURABLES 4.8%
Leggett & Platt Inc. ............................. 1,049,000 23,078,000
Newell Co. ....................................... 313,700 12,940,125
------------
36,018,125
------------
CONSUMER NON-DURABLES 6.8%
Alberto-Culver Co., A ............................ 752,100 18,990,525
Block Drug Co. Inc., A ........................... 195,240 8,468,516
DIMON Inc. ....................................... 633,000 4,707,938
Philip Morris Cos. Inc. .......................... 120,000 6,420,000
Universal Corp. .................................. 356,300 12,515,038
------------
51,102,017
------------
ELECTRONIC TECHNOLOGY 2.0%
Cohu Inc. ........................................ 395,200 8,694,400
Hewlett-Packard Co. .............................. 89,900 6,141,294
------------
14,835,694
------------
ENERGY MINERALS .8%
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) 124,300 5,950,863
------------
FINANCE 15.3%
Fannie Mae ....................................... 147,000 10,878,000
First Union Corp. ................................ 310,026 18,853,456
Mercantile Bankshares Corp. ...................... 232,525 8,952,213
National Commerce Bancorp ........................ 921,400 17,333,838
State Street Corp. ............................... 147,400 10,253,513
TrustCo Bank Corp., N.Y. shs ..................... 384,580 11,537,400
US Bancorp ....................................... 358,500 12,726,750
Washington Mutual Inc. ........................... 431,400 16,474,088
Wilmington Trust Corp. ........................... 130,000 8,011,250
------------
115,020,508
------------
HEALTH TECHNOLOGY 4.4%
Becton, Dickinson and Co. ........................ 25,800 1,101,338
Superior Uniform Group Inc. ...................... 265,800 3,854,100
(e)West Co. Inc. .................................... 784,300 27,989,706
------------
32,945,144
------------
INSURANCE 11.8%
American Heritage Life Investment Corp. .......... 159,900 3,907,556
American International Group Inc. ................ 120,050 11,599,830
Chubb Corp. ...................................... 173,000 11,223,375
Harleysville Group Inc. .......................... 135,600 3,500,175
Mercury General Corp. ............................ 345,000 15,115,312
MMI Cos. Inc. .................................... 622,500 10,426,875
ReliaStar Financial Corp. ........................ 424,600 19,584,675
RLI Corp ......................................... 267,856 8,906,212
St. Paul Cos. Inc. ............................... 130,000 4,517,500
------------
88,781,510
------------
NON-ENERGY MINERALS .6%
Nucor Corp. ...................................... 108,000 4,671,000
------------
</TABLE>
113
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PROCESS INDUSTRIES 11.9%
Bemis Co. Inc. ............................................ 534,500 $ 20,277,594
Brady Corp., A ............................................ 155,700 4,194,169
Donaldson Co. Inc. ........................................ 176,200 3,656,150
Hanna (M.A.) Co. .......................................... 626,900 7,718,706
Millipore Corp. ........................................... 242,900 6,907,469
Pall Corp. ................................................ 1,338,100 33,870,656
The Sherwin-Williams Co. .................................. 452,000 13,277,500
------------
89,902,244
------------
PRODUCER MANUFACTURING 18.7%
Avery Dennison Corp. ...................................... 216,700 9,765,044
Baldor Electric Co. ....................................... 458,333 9,281,243
Diebold Inc. .............................................. 314,000 11,205,875
Dover Corp. ............................................... 349,600 12,804,100
Flowserve Corp. ........................................... 109,000 1,805,313
General Electric Co. ...................................... 69,600 7,103,550
Graco Inc. ................................................ 174,600 5,150,700
Hubbell Inc., B ........................................... 281,700 10,704,600
Kaydon Corp. .............................................. 485,900 19,466,369
Kimball International Inc., B ............................. 605,900 11,512,100
Myers Industries Inc. ..................................... 443,260 12,716,020
Superior Industries International Inc. .................... 244,700 6,805,719
Teleflex Inc. ............................................. 243,300 11,100,563
Watts Industries Inc., A .................................. 677,000 11,255,125
------------
140,676,321
------------
RETAIL TRADE 11.8%
Family Dollar Stores Inc. ................................. 2,229,800 49,055,600
Rite Aid Corp. ............................................ 302,000 14,967,875
Schultz Sav-O Stores Inc. ................................. 188,900 3,116,850
The Limited Inc. .......................................... 261,000 7,601,625
Wal-Mart Stores Inc. ...................................... 168,200 13,697,788
------------
88,439,738
------------
TRANSPORTATION 1.3%
Circle International Group Inc. ........................... 477,900 9,796,950
------------
TOTAL COMMON STOCKS (COST $561,028,731) ................... 733,023,875
------------
CONVERTIBLE PREFERRED STOCKS .2%
American Heritage Corp., 8.50%, cvt. pfd. (COST $1,210,000) 24,200 1,612,325
------------
TOTAL LONG TERM INVESTMENTS ($562,238,731) ................ 734,636,200
------------
</TABLE>
114
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
RISING DIVIDENDS FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 2.5%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $18,552,247) (COST $18,542,602) $ 18,542,602 $ 18,542,602
Barclays Capital Inc. (Maturity Value $942,126)
Bear, Stearns & Co. Inc. (Maturity Value $244,255)
Chase Securities Inc. (Maturity Value $1,919,146)
CIBC Oppenheimer Corp. (Maturity Value $1,919,146)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,919,146)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,919,146)
Goldman, Sachs & Co. (Maturity Value $523,404)
Greenwich Capital Markets Inc. (Maturity Value $1,919,146)
Lehman Brothers Inc. (Maturity Value $348,937)
NationsBanc Montgomery Securities (Maturity Value $1,919,146)
Paine Webber Inc. (Maturity Value $1,046,808)
Paribas Corp. (Maturity Value $1,919,146)
Warburg Dillon Read LLC (Maturity Value $2,012,695)
Collateralized by U.S. Treasury Bills & Notes
-------------
TOTAL INVESTMENTS (COST $580,781,333) 100.2% ............................................. 753,178,802
OTHER ASSETS, LESS LIABILITIES (.2%) ...................................................... (1,309,806)
-------------
NET ASSETS 100.0% ......................................................................... $ 751,868,996
=============
</TABLE>
(e)See Note 9 regarding Holding of 5% Voting Securities.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
115
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.6%
COMMERCIAL SERVICES 2.8%
(a)24/7 Media Inc. ....................... 34,800 $ 974,400
(a)Applied Graphics Technologies Inc. .... 93,700 1,546,050
Norrell Corp. ......................... 82,100 1,210,975
(a)NOVA Corp. ............................ 55,900 1,939,031
(a)RemedyTemp Inc., A .................... 29,500 446,188
(a)SOS Staffing Services Inc. ............ 75,500 547,375
(a)Sylvan Learning Systems Inc. .......... 74,100 2,260,050
-----------
8,924,069
-----------
CONSUMER DURABLES .8%
(a)Activision Inc. ....................... 125,700 1,398,413
(a)Electronic Arts Inc. .................. 20,000 1,122,500
Ethan Allen Interiors Inc. ............ 2,500 102,500
-----------
2,623,413
-----------
CONSUMER NON-DURABLES 3.0%
Alberto-Culver Co., A ................. 23,300 588,325
(a)Consolidated Cigar Holdings Inc. ...... 115,900 2,049,981
(a)Sola International Inc. ............... 24,400 420,900
(a)Tommy Hilfiger Corp. .................. 73,800 4,428,000
(a)Tropical Sportswear International Corp. 38,900 1,395,538
Wolverine World Wide Inc. ............. 55,000 728,750
-----------
9,611,494
-----------
(a)CONSUMER SERVICES 3.6%
DeVry Inc. ............................ 77,800 2,382,625
Jones Intercable Inc. ................. 2,100 73,763
Jones Intercable Inc., A .............. 29,100 1,036,688
The Marquee Group Inc. ................ 160,800 723,600
MeriStar Hotels & Resorts Inc. ........ 120,000 315,000
Prime Hospitality Corp. ............... 238,000 2,513,875
Rio Hotel & Casino Inc. ............... 62,400 990,600
SFX Entertainment Inc., A ............. 40,000 2,195,000
Vail Resorts Inc. ..................... 47,200 1,038,400
-----------
11,269,551
-----------
(a)ELECTRONIC TECHNOLOGY 17.9%
Advanced Energy Industries Inc. ....... 126,200 3,155,000
Coherent Inc. ......................... 178,400 2,218,850
Com21 Inc. ............................ 70,400 1,478,400
DuPont Photomasks Inc. ................ 400 16,975
Etec Systems Inc. ..................... 66,100 2,644,000
Excel Switching Corp. ................. 3,100 117,800
Flextronics International Ltd. ........ 20,000 1,712,500
FLIR Systems Inc. ..................... 90,000 2,092,500
Fvc.com Inc. .......................... 24,000 378,000
Gemstar International Group Ltd. ...... 57,000 3,263,250
H.T.E. Inc. ........................... 131,800 659,000
Harmonic Lightwaves Inc. .............. 77,700 1,456,875
Itron Inc. ............................ 67,400 484,438
Jabil Circuit Inc. .................... 34,200 2,552,175
Komag Inc. ............................ 317,800 3,297,175
Ladish Co. Inc. ....................... 61,800 517,575
Level One Communications Inc. ......... 80,000 2,840,000
Mettler-Toledo International Inc. ..... 110,000 3,086,875
Natural MicroSystems Corp. ............ 82,000 597,067
Novellus Systems Inc. ................. 40,000 1,980,000
Perceptron Inc. ....................... 85,000 563,125
</TABLE>
116
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)ELECTRONIC TECHNOLOGY (CONT.)
Photronics Inc. ................................... 8,400 $ 201,338
PMC-Sierra Inc. ................................... 58,000 3,661,250
Rainbow Technologies Inc. ......................... 73,950 1,391,184
Sanmina Corp. ..................................... 26,800 1,675,000
Security Dynamics Technologies Inc. ............... 185,700 4,271,100
SIPEX Corp. ....................................... 10,600 372,325
Tekelec ........................................... 187,400 3,103,813
Transcrypt International Inc. ..................... 67,300 189,281
TriStar Aerospace Co. ............................. 31,400 219,800
Uniphase Corp. .................................... 59,200 4,107,000
Waters Corp. ...................................... 6,600 575,850
Xylan Corp. ....................................... 84,900 1,491,043
-----------
56,370,564
-----------
ENERGY MINERALS 4.0%
(a)Barrett Resources Corp. ........................... 153,900 3,693,600
(a)Denbury Resources Inc. ............................ 85,800 348,563
Devon Energy Corp. ................................ 22,400 687,400
(a)Newfield Exploration Co. .......................... 135,800 2,834,825
Range Resources Corp. ............................. 125,000 429,688
Snyder Oil Corp. .................................. 128,200 1,706,663
(a)Titan Exploration Inc. ............................ 243,200 1,596,000
(a)Tom Brown Inc. .................................... 139,700 1,401,373
-----------
12,698,112
-----------
FINANCE 6.4%
(a)Affiliated Managers Group Inc. .................... 37,100 1,108,363
Allied Capital Corp. .............................. 30,000 519,375
Bank United Corp., A .............................. 50,000 1,962,500
Espirito Santo Financial Group SA, ADR (Luxembourg) 125,700 2,459,006
(a)E*Trade Group Inc. ................................ 40,000 1,871,252
EVEREN Capital Corp. .............................. 84,000 1,911,000
Federated Investors Inc., B ....................... 122,900 2,227,563
Freedom Securities Corp. .......................... 26,300 397,788
(a)Golden State Bancorp Inc. ......................... 118,000 1,961,750
(a)Hambrecht & Quist Group ........................... 20,000 453,750
(a)HealthCare Financial Partners Inc. ................ 29,100 1,160,363
Heller Financial Inc. ............................. 49,000 1,439,375
Silicon Valley Bancshares ......................... 97,400 1,658,849
Westamerica Bancorp ............................... 27,900 1,025,325
-----------
20,156,259
-----------
(a)HEALTH SERVICES 3.3%
American Dental Partners Inc. ..................... 22,300 257,844
Medaphis Corp. .................................... 44,900 147,330
New American Healthcare Corp. ..................... 37,100 415,056
PAREXEL International Corp. ....................... 65,000 1,625,000
Pediatrix Medical Group Inc. ...................... 8,900 533,444
Pharmaceutical Product Development Inc. ........... 100,000 3,006,250
Renal Care Group Inc. ............................. 94,650 2,727,103
Total Renal Care Holdings Inc. .................... 15,933 471,019
Transitions Systems Inc. .......................... 70,900 1,063,500
-----------
10,246,546
-----------
HEALTH TECHNOLOGY 3.5%
(a)DepoTech Corp. .................................... 83,600 193,325
(a)Heska Corp. ....................................... 50,300 223,206
(a)Incyte Pharmaceuticals Inc. ....................... 12,500 467,188
</TABLE>
117
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY (CONT.)
(a)Inhale Therapeutic Systems ............... 84,300 $ 2,781,900
Mentor Corp. ............................. 57,300 1,342,969
(a)Neurogen Corp. ........................... 64,200 1,123,500
(a)OrthoLogic Corp. ......................... 245,000 819,231
(a)Serologicals Corp. ....................... 138,750 4,162,500
-----------
11,113,819
-----------
INDUSTRIAL SERVICES 3.6%
(a)Atwood Oceanics Inc. ..................... 3,400 57,800
(a)Catalytica Inc. .......................... 193,733 3,487,194
(a)Core Laboratories, NV (Netherlands) ...... 110,400 2,111,400
(a)Marine Drilling Cos. Inc. ................ 71,100 546,581
Safety-Kleen Corp. ....................... 12,500 176,563
(a)Tuboscope Inc. ........................... 121,300 985,563
(a)U.S. Liquids Inc. ........................ 74,800 1,683,000
Varco International Inc. ................. 300,800 2,331,200
-----------
11,379,301
-----------
INSURANCE 4.0%
(a)Amerin Corp. ............................. 58,200 1,374,975
Executive Risk Inc. ...................... 45,000 2,472,188
Financial Security Assurance Holdings Ltd. 63,000 3,417,750
HCC Insurance Holdings Inc. .............. 22,300 393,038
Life USA Holding Inc. .................... 47,200 607,700
Reinsurance Group of America Inc. ........ 24,400 1,708,000
(a)Risk Capital Holdings Inc. ............... 125,000 2,718,750
-----------
12,692,401
-----------
NON-ENERGY MINERALS .6%
Carpenter Technology Corp. ............... 51,600 1,751,175
-----------
PROCESS INDUSTRIES .7%
ChemFirst Inc. ........................... 85,100 1,680,725
(a)CUNO Inc. ................................ 12,000 195,000
Optical Coating Laboratory Inc. .......... 16,700 434,200
-----------
2,309,925
-----------
PRODUCER MANUFACTURING 3.0%
(a)Gentex Corp. ............................. 137,800 2,756,000
(a)Gibraltar Steel Corp. .................... 116,700 2,654,925
JLG Industries Inc. ...................... 111,400 1,740,625
Reliance Steel & Aluminum Co. ............ 9,000 248,625
Roper Industries Inc. .................... 107,400 2,188,275
-----------
9,588,450
-----------
REAL ESTATE 5.9%
Arden Realty Inc. ........................ 100,000 2,318,750
Camden Property Trust .................... 110,000 2,860,000
Colonial Properties Trust ................ 28,400 756,150
Cornerstone Properties Inc. .............. 8,000 125,000
FelCor Lodging Trust Inc. ................ 102,000 2,352,375
Glenborough Realty Trust Inc. ............ 64,100 1,306,038
Innkeepers USA Trust ..................... 218,900 2,585,756
MeriStar Hospitality Corp. ............... 130,000 2,413,125
OMEGA Healthcare Investors Inc. .......... 27,400 827,138
SL Green Realty Corp. .................... 30,900 668,213
Storage Trust Realty ..................... 66,400 1,552,100
Winston Hotels Inc. ...................... 98,000 802,375
-----------
18,567,020
-----------
</TABLE>
118
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)RETAIL TRADE 1.3%
Beyond.com Corp. .............................. 90,000 $ 1,867,500
Guitar Center Inc. ............................ 85,000 2,093,125
-----------
3,960,625
-----------
(a)TECHNOLOGY SERVICES 20.5%
Actuate Software Corp. ........................ 17,600 347,600
Affiliated Computer Services Inc., A .......... 174,800 7,866,000
Aspen Technology Inc. ......................... 8,600 124,700
Brightpoint Inc. .............................. 25,900 356,125
Brio Technology Inc. .......................... 22,000 389,125
Cambridge Technology Partners Inc. ............ 47,300 1,046,513
Check Point Software Technologies Ltd. ........ 11,700 536,006
Concord Communications Inc. ................... 30,000 1,702,500
Documentum Inc. ............................... 37,000 1,977,188
DoubleClick Inc. .............................. 25,300 1,152,731
Entrust Technologies Inc. ..................... 55,200 1,317,900
Envoy Corp. ................................... 60,600 3,529,950
Harbinger Corp. ............................... 44,150 353,200
HNC Software Inc. ............................. 92,700 3,748,556
i2 Technologies Inc. .......................... 116,000 3,523,500
Information Advantage Inc. .................... 17,400 131,588
Integrated Systems Inc. ....................... 125,700 1,877,644
International Network Services ................ 83,800 5,572,700
Intuit Inc. ................................... 80,800 5,858,000
Micromuse Inc. ................................ 60,000 1,170,000
Sapient Corp. ................................. 63,200 3,539,200
Sterling Commerce Inc. ........................ 6,058 272,610
Synopsys Inc. ................................. 109,000 5,913,250
Transaction Systems Architects Inc. ........... 72,000 3,600,000
The Vantive Corp. ............................. 132,300 1,058,400
VERITAS Software Corp. ........................ 45,000 2,697,188
Visio Corp. ................................... 40,000 1,462,500
Whittman-Hart Inc. ............................ 21,900 604,988
Wind River Systems Inc. ....................... 60,700 2,852,900
-----------
64,582,562
-----------
(a)TELECOMMUNICATIONS 4.9%
ICG Communications Inc. ....................... 156,000 3,354,000
Intermedia Communications Inc. ................ 121,200 2,090,700
Millicom International Cellular SA (Luxembourg) 62,400 2,176,200
Paging Network Inc. ........................... 174,800 819,375
Primus Telecommunications Group Inc. .......... 132,500 2,186,250
Rural Cellular Corp., A ....................... 139,300 1,462,650
Western Wireless Corp., A ..................... 148,100 3,258,200
-----------
15,347,375
-----------
TRANSPORTATION 3.8%
Air Express International Corp. ............... 100,000 2,175,000
(a)Atlantic Coast Airlines Holdings .............. 171,000 4,275,000
C.H. Robinson Worldwide Inc. .................. 112,600 2,920,563
Expeditors International of Washington Inc. ... 54,800 2,301,600
Mesaba Holdings Inc. .......................... 12,900 266,063
-----------
11,938,226
-----------
TOTAL LONG TERM INVESTMENTS (COST $278,870,540) 295,130,887
-----------
</TABLE>
119
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
SMALL CAP FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 9.0%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $28,550,183) (COST $28,535,341) $28,535,341 $ 28,535,341
Barclays Capital Inc. (Maturity Value $1,449,736)
Bear, Stearns & Co. Inc. (Maturity Value $375,995)
Chase Securities Inc. (Maturity Value $2,953,431)
CIBC Oppenheimer Corp. (Maturity Value $2,953,431)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,953,431)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $2,953,431)
Goldman, Sachs & Co. (Maturity Value $805,377)
Greenwich Capital Markets Inc. (Maturity Value $2,953,431)
Lehman Brothers Inc. (Maturity Value $537,013)
NationsBanc Montgomery Securities LLC (Maturity Value $2,953,431)
Paine Webber Inc. (Maturity Value $1,610,755)
Paribas Corp. (Maturity Value $2,953,431)
Warburg Dillon Read LLC (Maturity Value $3,097,290)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $307,405,881) 102.6% 323,666,228
OTHER ASSETS, LESS LIABILITIES (2.6%) (8,206,370)
------------
NET ASSETS 100.0% $315,459,858
------------
</TABLE>
(a)Non-income producing.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
120
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<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS 99.7%
ARGENTINA 6.3%
Astra Cia Argentina de Petroleo SA ..................... Energy Sources 65,000 $ 76,769
(a)Atanor Cia Nacional Para la Industria Quimica SA, D .... Chemicals 524,163 299,042
Banco de Galicia y Buenos Aires SA, B .................. Banking 63,765 280,819
Banco Frances SA ....................................... Banking 21,500 152,788
(a)Buenos Aires Embotelladora SA, B, ADR .................. Beverages & Tobacco 56,200 562
(a)Capex SA, A ............................................ Utilities Electrical & Gas 48,735 279,503
Molinos Rio de la Plata SA, B .......................... Food & Household Products 936,348 2,202,400
Nobleza Piccardo Sdad Industrial Comercial y Financial.. Beverages & Tobacco 48,472 164,953
Perez Companc SA, B .................................... Energy Sources 254,195 1,076,213
Quilmes Industrial SA, ADR ............................. Beverages & Tobacco 137,400 1,279,538
Siderca SA, A .......................................... Metals & Mining 192,490 219,636
(a)Sociedad Comercial del Plata Cadelplata Come ........... Multi-Industry 1,662,960 1,173,443
Telecom Argentina Stet-France SA, ADR .................. Telecommunications 11,900 327,250
Telefonica de Argentina SA, B, ADR ..................... Telecommunications 17,210 480,804
Transportadora de Gas del Sur SA, B .................... Utilities Electrical & Gas 102,030 202,201
Transportadora de Gas del Sur SA, B, ADR ............... Utilities Electrical & Gas 7,100 71,888
YPF Sociedad Anonima, ADR .............................. Energy Sources 67,893 1,896,761
-----------
10,184,570
-----------
BRAZIL 11.3%
Aracruz Celulose SA, ADR ............................... Forest Products & Paper 119,000 952,000
Banco Bradesco SA BBD .................................. Banking 135,190,083 707,140
Banco Bradesco SA BBD, pfd. ............................ Banking 110,232,124 611,260
(a)Banco Bradesco SA BBD, rts. ............................ Banking 6,018,004 1,534
(a)Banco Bradesco SA BBD, rts., pfd. ...................... Banking 4,569,026 2,602
Banco do Brasil SA ..................................... Banking 87,754,976 486,620
Banco do Brazil SA, pfd. ............................... Banking 33,350,000 223,575
Brasmotor SA, pfd. ..................................... Multi-Industry 4,019,000 399,156
Centrais Eletricas Brasileiras SA (Electrobras) ........ Utilities Electrical & Gas 96,602,000 1,663,002
Centrais Eletricas Brasileiras SA (Electrobras),B, pfd. Utilities Electrical & Gas 128,691,000 2,471,038
(a)Centrais Geradoras Do Sul Do Brasil SA, B, pfd. ........ Utilities Electrical & Gas 209,667,000 260,294
Cia Cervejaria Brahma, pfd. ............................ Beverages & Tobacco 416,000 181,790
Cia Energetica de Minas Gerais Cemig, Br., pfd. ........ Utilities Electrical & Gas 30,921,000 588,606
(a)Cia Mesbla SA, pfd. .................................... Merchandising 7,400,000 1,837
(a)Cia Mesbla SA, rts. .................................... Merchandising 14,694,386 730
Cia Vale do Rio Doce, A, pfd. .......................... Metals & Mining 43,900 563,170
(a)Companhia Energetica do Ceara, pfd. .................... Utilities Electrical & Gas 23,320,000 57,902
Companhia Paranaense De Energia-Copel, ADR ............. Utilities Electrical & Gas 12,000 85,500
Companhia Siderurgica Nacional Sid Nacional CSN ........ Metals & Mining 40,323,000 901,073
Copene-Petroquimica do Nordeste SA, A, pfd. ............ Chemicals 3,069,700 350,605
Duratex SA, pfd. ....................................... Forest Products & Paper 56,354,800 1,539,175
Investimentos Itau SA, pfd. ............................ Multi-Industry 2,222,200 1,232,257
(a)Mannesmann SA .......................................... Machinery & Engineering 2,121,500 131,688
(a)Mannesmann SA, pfd. .................................... Machinery & Engineering 309,200 14,843
Petroleo Brasileiro SA, pfd. ........................... Energy Sources 18,817,000 2,133,606
Souza Cruz SA .......................................... Beverages & Tobacco 34,000 219,491
(a)Telecomunicacoes Brasileiras SA, unit .................. Telecommunications 29,560,000 1,321,117
(a)Telecomunicacoes Brasileiras SA, unit, pfd. ............ Telecommunications 10,191,000 747,298
Unibanco Uniao de Bamncos Brasileiros SA, unit ......... Banking 15,439,000 536,675
-----------
18,385,584
-----------
CHILE 3.6%
Cia Cervecerias Unidas SA, ADR ......................... Beverages & Tobacco 15,000 288,750
Compania De Telecomunicaciones De Chile SA, ADR ........ Telecommunications 110,000 2,275,625
Empresa Nacional de Electricidad SA, ADR ............... Electrical & Electronics 155,100 1,764,263
Enersis SA, ADR ........................................ Utilities Electrical & Gas 39,600 1,022,175
Quinenco SA, ADR ....................................... Multi-Industry 47,900 383,200
Sociedad Quimica y Minera de Chile SA, ADR ............. Chemicals 3,000 101,063
-----------
5,835,076
-----------
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
CHINA 1.9%
China Resources Enterprises Ltd. ........................ Multi-Industry 207,000 $ 323,302
(a)China Southern Glass Co. Ltd., B ........................ Building Materials & Components 1,765,445 161,795
China Vanke Co. Ltd., B ................................. Real Estate 2,857,867 785,731
Chiwan Wharf Holdings Ltd., B ........................... Transportation 1,132,000 116,893
Guangshen Railway Co. Ltd., H ........................... Transportation 1,187,000 137,894
Guangshen Railway Co. Ltd., H, ADR ...................... Transportation 12,700 76,200
Shandong Huaneng Power Development Co. Ltd., ADR ........ Utilities Electrical & Gas 96,500 440,281
(a)Shanghai Dazhong Taxi Shareholding Co. Ltd., B .......... Transportation 569,300 240,245
(a)Shanghai Jin Jiang Tower Co. Ltd., B .................... Leisure & Tourism 1,891,600 166,461
(a)Shanghai Lujiaxui Finance & Trade Zn Dev Stock Co Ltd., B Real Estate 284,900 91,738
Shanghai Petrochemical Co. Ltd., H ...................... Chemicals 2,540,000 229,501
(a)Shanghai Tyre & Rubber Co. Ltd., B ...................... Industrial Components 1,472,570 147,257
(a)Shanghai Vacuum Electron Devices Co. Ltd., B ............ Appliances & Household Durables 580,433 67,330
Shanghai Yaohua Pilkington Glass, B ..................... Building Materials & Components 477,600 40,596
-----------
3,025,224
-----------
COLOMBIA 1.3%
Bavaria SA .............................................. Beverages & Tobacco 228,607 1,152,268
Cementos Argos SA ....................................... Building Materials & Components 262,000 746,637
Compania Nacional de Chocolates SA ...................... Food & Household Products 64,363 278,664
-----------
2,177,569
-----------
CROATIA
Pliva D D, GDR, Reg S ................................... Health & Personal Care 3,900 64,740
-----------
CZECH REPUBLIC 2.6%
(a)CEZ AS .................................................. Utilities Electrical & Gas 128,080 2,830,632
(a)SPT Telecom AS .......................................... Telecommunications 66,310 1,011,288
Tabak AS ................................................ Beverages & Tobacco 250 69,844
Unipetrol ............................................... Chemicals 208,938 375,700
-----------
4,287,464
-----------
GHANA 1.0%
Ashanti Goldfields Co. Ltd., GDR, Reg S ................. Metals & Mining 167,364 1,569,038
-----------
HONG KONG 7.3%
Cheung Kong Holdings Ltd. ............................... Multi-Industry 337,000 2,425,086
Citic Pacific Ltd. ...................................... Multi-Industry 552,000 1,189,893
Dairy Farm International Holdings Ltd. .................. Merchandising 221,772 255,038
Hang Lung Development Co. Ltd. .......................... Real Estate 1,021,000 1,093,846
Hong Kong & Shanghai Hotels Ltd. ........................ Leisure & Tourism 568,000 403,240
Hong Kong Electric Holdings Ltd. ........................ Utilities Electrical & Gas 180,400 547,214
HSBC Holdings Plc ....................................... Banking 66,155 1,648,058
Hutchison Whampoa Ltd. .................................. Multi-Industry 41,000 289,748
IMC Holdings Ltd. ....................................... Transportation 66,000 6,389
Jardine Matheson Holdings Ltd. .......................... Multi-Industry 217,015 559,899
New World Development Co. Ltd. .......................... Real Estate 911,231 2,293,589
(a)Semi-Tech Co. Ltd. ...................................... Appliances & Household Durables 1,452,071 59,978
Sun Hung Kai Properties Ltd. ............................ Real Estate 138,739 1,011,811
Yue Yuen Industrial (Holdings) Ltd. ..................... Recreation & Other Consumer Goods 67,200 129,243
-----------
11,913,032
-----------
HUNGARY 1.4%
Borsodchem RT ........................................... Chemicals 19,330 502,789
Borsodchem RT, GDR, Reg S ............................... Chemicals 13,000 338,325
(a)Danubius Hotel and SpA RT ............................... Leisure & Tourism 3,000 62,844
Gedeon Richter Ltd. ..................................... Health & Personal Care 12,950 551,877
Mol Magyar Olay-Es Gazipari RT .......................... Energy Sources 7,330 201,043
Tiszai Vegyi Kombinat RT ................................ Chemicals 44,001 592,689
-----------
2,249,567
-----------
</TABLE>
122
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
INDIA 3.0%
Arvind Mills Ltd. ............................ Textiles & Apparel 143,000 $ 130,057
Bajaj Auto Ltd. .............................. Automobiles 9,800 120,204
(a)Bank of Baroda ............................... Banking 95,700 111,697
(a)Bharat Petroleum Corp. Ltd. .................. Energy Sources 30,000 164,626
Bombay Dyeing & Manufacturing Co. Ltd. ....... Chemicals 2,200 3,000
Cummins India Ltd. ........................... Machinery & Engineering 4,000 28,944
Grasim Industries Ltd. ....................... Multi-Industry 22,900 97,158
Grasim Industries Ltd., GDR .................. Multi-Industry 26,000 118,300
Great Eastern Shipping Co. Ltd. .............. Transportation 297,800 161,527
Gujarat Industries Power Ltd. ................ Energy Equipment & Services 52,100 30,343
Hindustan Organic Chemicals Ltd. ............. Chemicals 25,900 4,815
Hindustan Petroleum Corporation Ltd. ......... Energy Sources 39,400 217,970
ICICI Ltd. ................................... Financial Services 182,480 202,034
India Cements Ltd. ........................... Building Materials & Components 40,900 31,135
(a)India Cements Ltd., GDR ...................... Building Materials & Components 3,051 2,288
Indian Aluminium Co. Ltd. .................... Metals & Mining 45,000 96,256
Indian Petrochemicals Corp. Ltd. ............. Chemicals 204,200 275,334
(a)Indian Rayon & Industries Ltd. ............... Multi-Industry 30,525 80,809
Indian Rayon & Industries Ltd., GDR .......... Multi-Industry 10,669 26,939
Indo Gulf Corp. Ltd. ......................... Chemicals 142,300 93,591
Industrial Development Bank of India ......... Banking 166,300 142,639
Larsen & Toubro Ltd. ......................... Multi-Industry 157,500 594,846
Larsen and Toubro Ltd., GDR, Reg S ........... Multi-Industry 15,875 121,841
Mahanagar Telephone Nigam Ltd. ............... Telecommunications 12,400 53,456
National Aluminium Co. Ltd. .................. Metals & Mining 617,100 273,726
Oriental Bank of Commerce .................... Banking 294,800 259,100
Reliance Industries Ltd. ..................... Chemicals 115,400 325,321
Satyam Computers Services Ltd. ............... Data Processing & Reproduction 2,200 37,662
(a)Shipping Corporation of India Ltd. ........... Transportation 179,200 88,554
Steel Authority of India Ltd. ................ Metals & Mining 74,100 9,852
Steel Authority of India Ltd., GDR, Reg S .... Metals & Mining 22,000 43,450
Tata Chemicals Ltd. .......................... Chemicals 69,350 165,312
Tata Engineering & Locomotive Co. Telco ...... Machinery & Engineering 147,500 565,756
(a)Tata Hydro-Electric Power Company ............ Utilities Electrical & Gas 20,000 37,462
Tata Iron & Steel Co., Ltd. .................. Metals & Mining 10,000 27,626
Thermax Ltd. ................................. Energy Equipment & Services 2,200 7,403
Videsh Sanchar Nigam Ltd., GDR ............... Telecommunications 5,000 61,250
----------
4,812,283
----------
INDONESIA 3.2%
(a)Asia Pulp & Paper Co. Ltd., ADR .............. Forest Products & Paper 91,700 750,794
(a)PT Barito Pacific Timber TBK ................. Forest Products & Paper 3,211,000 141,365
(a)PT BBL Dharmala Finance TBK, fgn. ............ Financial Services 150,000 26,415
(a)PT BDNI Capital Corp., fgn. .................. Financial Services 411,000 9,047
(a)PT Charoen Pokphand Indonesia ................ Food & Household Products 1,733,750 32,712
PT Gudang Garamm ............................. Beverages & Tobacco 118,000 172,918
(a)PT Indah Kiat Pulp & Paper Corp. ............. Forest Products & Paper 1,747,000 477,953
(a)PT Indocement Tunggal Prakarsa ............... Building Materials & Components 1,396,500 557,722
(a)PT Indofoods Sukses Makmurr .................. Food & Household Products 684,020 348,463
PT Indosat ................................... Telecommunications 197,000 258,330
(a)PT Inter-Pacific Bank, fgn. .................. Banking 15,000 377
PT Semen Gresik (Persero) .................... Building Materials & Components 444,000 463,547
(a)PT Sinar Mas Agro Resources & Technology Corp. Food & Household Products 745,800 159,479
(a)PT Sinar Mas Multi Artha, fgn. ............... Financial Services 98,250 20,700
(a)PT Summarecon Agung .......................... Real Estate 668,069 12,605
PT Telekomunikasi Indonesia (Persero), B ..... Telecommunications 1,558,500 529,302
PT Timah ..................................... Metals & Mining 1,002,000 677,453
(a)PT Tjiwi Kimia ............................... Forest Products & Paper 2,251,926 587,767
----------
5,226,949
----------
</TABLE>
123
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
ISRAEL .4%
(a)Clal Industries Ltd. ....................... Multi-Industry 104,802 $ 511,401
Koor Industries Ltd. ....................... Multi-Industry 1,466 127,920
-----------
639,321
-----------
JORDAN .1%
Jordan Cement Factories Ltd. ............... Building Materials & Components 36,000 156,742
-----------
MALAYSIA 2.8%
AMMB Holdings Bhd. ......................... Financial Services 129,000 121,405
Boustead Holdings Bhd. ..................... Food & Household Products 384,000 240,391
Cosway Corporation Bhd. .................... Appliances & Household Durables 453,000 143,696
Edaran Otomobil Nasional Bhd. .............. Automobiles 3,000 3,781
Federal Flour Mills Bhd. ................... Food & Household Products 103,000 80,492
Genting Bhd. ............................... Leisure & Tourism 311,400 539,688
Hong Leong Industries Bhd. ................. Multi-Industry 336,200 168,797
Hong Leong Industries Bhd., wts. ........... Multi-Industry 38,000 3,991
Hong Leong Properties Bhd. ................. Real Estate 474,000 78,664
Island & Peninsula Bhd. .................... Real Estate 458,000 292,489
Kian Joo Can Factory Bhd. .................. Industrial Components 85,000 99,995
(a)Leader Universal Holdings Bhd. ............. Industrial Components 982,000 216,606
Malaysian Airlines System Bhd. ............. Transportation 197,000 86,080
Malaysian International Shipping Corp., fgn. Transportation 207,666 218,125
(a)MBF Capital Bhd. ........................... Financial Services 107,000 19,219
Oriental Holdings Bhd. ..................... Automobiles 39,000 47,928
Perlis Plantations Bhd. .................... Multi-Industry 360,500 295,352
Perusahaan Otomobil Nasional Bhd. .......... Automobiles 214,000 258,495
PPB Oil Palms Bhd. ......................... Multi-Industry 625 382
Public Bank Bhd. ........................... Banking 368,000 154,614
Public Bank Bhd., fgn. ..................... Banking 31,000 12,048
Renong Bhd. ................................ Multi-Industry 1,608,000 310,774
Resorts World Bhd. ......................... Leisure & Tourism 756,000 695,611
Shangri La Hotels (Malaysia) Bhd. .......... Leisure & Tourism 1,010,000 269,461
Tanjong Plc. ............................... Recreation & Other Consumer Goods 189,000 214,401
Technology Resources Industries Bhd. ....... Multi-Industry 104,000 43,258
-----------
4,615,743
-----------
MEXICO 10.3%
Cemex SA ................................... Building Materials & Components 54,810 118,320
Cemex SA, B ................................ Building Materials & Components 1,454,500 3,654,633
(a)Cifra SA de CV, V .......................... Merchandising 209,000 253,589
Coca Cola Femsa SA de CV, L, ADR ........... Beverages & Tobacco 67,300 891,725
Cydea SA de CV, A .......................... Multi-Industry 69,938 63,644
DESC SA de CV DESC, B ...................... Multi-Industry 460,170 394,564
(a)Grupo Financiero Banamex Accival SA de CV, B Banking 461,000 605,966
(a)Grupo Financiero Banamex Accival SA de CV, L Banking 992,137 1,143,616
Grupo Financiero Bancomer SA de CV, L ...... Banking 1,300,370 184,077
Grupo Financiero Serfin SA de CV, B ........ Banking 2,607,816 232,040
Panamerican Beverages Inc., A .............. Food & Household Products 5,900 128,694
Telefonos de Mexico SA (Telmex), L, ADR .... Telecommunications 163,200 7,945,800
Vitro SA De CV ............................. Food & Household Products 699,849 1,026,068
-----------
16,642,736
-----------
PAKISTAN .6%
Pakistan Telecommunications Corp., A ....... Telecommunications 2,700,000 1,031,156
-----------
PERU .9%
Telefonica Del Peru SA, B, ADR ............. Telecommunications 109,500 1,389,281
-----------
PHILIPPINES 1.6%
(a)A Soriano Corp. ............................ Multi-Industry 2,414,000 51,506
Ayala Corp. ................................ Multi-Industry 393,500 139,091
(a)Filinvest Development Corp. ................ Real Estate 2,817,000 92,693
(a)Keppel Philippine Holdings Inc., B ......... Machinery & Engineering 638,000 11,481
</TABLE>
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- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
PHILIPPINES (CONT.)
(a)Petron Corp. .............................. Energy Sources 4,498,000 $ 491,427
Philippine Long Distance Telephone Co., ADR Telecommunications 58,000 1,504,375
RFM Corp. ................................. Food & Household Products 497,090 76,672
San Miguel Corp., B ....................... Food & Household Products 90,500 174,486
(a)Southeast Asia Cement Holdings Inc. ....... Building Materials & Components 10,600,000 130,797
----------
2,672,528
----------
POLAND 2.1%
Bank Handlowy W Warszawie SA, GDR, Reg S .. Banking 5,500 71,225
Bank Przemyslowo-Handlowy SA .............. Banking 15,088 894,104
Bank Rozwoju Eksportu SA .................. Banking 736 16,985
Bank Slaski SA W Katowicach ............... Banking 3,000 155,556
Big Bank Gdanski SA, G .................... Banking 1,172,050 1,051,840
Big Bank Gdanski SA, GDR, Reg S ........... Banking 12,333 167,112
Gorazdze SA ............................... Building Materials & Components 8,385 140,944
Polifarb Cieszyn Wroclaw SA ............... Chemicals 18,149 43,175
(a)Rolimpex SA ............................... Wholesale & International Trade 49,753 80,795
Warta SA .................................. Insurance 28,395 582,462
Wielkopolski Bank Kredytowy SA ............ Banking 14,742 92,819
Zaklady Piwowarskie W Zywcu SA ............ Beverages & Tobacco 780 93,333
----------
3,390,350
----------
RUSSIA .2%
Irkutskenergo ............................. Utilities Electrical & Gas 439,500 19,668
Irkutskenergo, ADR ........................ Utilities Electrical & Gas 7,000 15,663
(a)JSC Gorkovsky Augomobile Plant ............ Automobiles 1,310 23,908
Lukoil Holdings, ADR ...................... Energy Sources 3,360 54,432
Mosenergo ................................. Utilities Electrical & Gas 2,052,000 41,040
Mosenergo, ADR ............................ Utilities Electrical & Gas 3,000 5,625
Rostelekom ................................ Telecommunications 2,000 1,460
Rostelecom, ADR ........................... Telecommunications 11,900 49,831
Unified Energy Systems .................... Utilities Electrical & Gas 610,600 18,623
Unified Energy Systems, ADR ............... Utilities Electrical & Gas 12,000 36,828
(a)Vimpel Communications, ADR ................ Telecommunications 5,200 67,275
----------
334,353
----------
SINGAPORE 9.7%
Acer Computer International Ltd. .......... Electrical & Electronics 116,000 58,000
Acma Ltd. ................................. Electrical & Electronics 120,000 52,727
Asia Pacific Breweries Ltd. ............... Beverages & Tobacco 26,000 53,891
City Developments Ltd. .................... Real Estate 367,500 1,592,500
Cycle & Carriage Ltd. ..................... Automobiles 67,000 229,423
Delgro Corp. .............................. Transportation 50,000 64,848
First Capital Corp. Ltd. .................. Real Estate 323,000 215,333
Fraser and Neave Ltd. ..................... Beverages & Tobacco 441,000 1,288,255
G P Batteries International Ltd. .......... Electrical & Electronics 49,000 104,533
Hai Sun Hup Group Ltd. .................... Transportation 1,315,000 330,742
Hind Hotels International Ltd. ............ Leisure & Tourism 344,000 235,588
(a)Hong Leong Finance Ltd., fgn. ............. Financial Services 35,000 67,030
(a)Inchcape Marketing Services Ltd. .......... Broadcasting & Publishing 377,000 205,636
Inchcape Motors Ltd. ...................... Wholesale & International Trade 163,000 188,685
Isetan (Singapore) Ltd. ................... Merchandising 75,500 68,636
Jurong Shipyard Ltd. ...................... Machinery & Engineering 224,000 984,242
Keppel Corp., Ltd. ........................ Transportation 698,000 1,869,794
Metro Holdings Ltd. ....................... Wholesale & International Trade 147,000 138,091
Natsteel Ltd. ............................. Metals & Mining 1,007,000 1,104,648
(a)Neptune Orient Lines Ltd. ................. Transportation 339,000 108,891
(a)Osprey Maritime Ltd. ...................... Transportation 359,000 110,964
Osprey Maritime Ltd., 2.50%, cvt., pfd. ... Transportation 96,120 29,127
Overseas Chinese Banking Corp. Ltd., fgn. . Banking 302,000 2,049,939
Overseas Union Enterprise Ltd. ............ Leisure & Tourism 195,400 388,432
</TABLE>
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COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
SINGAPORE (CONT.)
Robinson & Co., Ltd. ................................. Merchandising 21,200 $ 47,539
(a)Sembcorp Industries Ltd. ............................. Multi-Industry 1,240,769 1,413,725
United Industrial Corporation Ltd. ................... Real Estate 1,371,000 548,400
United Overseas Bank Ltd., fgn. ...................... Banking 325,000 2,087,879
WBL Corp. Ltd. ....................................... Multi-Industry 135,000 86,727
-----------
15,724,225
-----------
SLOVAK REPUBLIC .4%
Nafta Gbely AS ....................................... Utilities Electrical & Gas 4,800 41,711
Slovnaft AS .......................................... Chemicals 28,010 502,012
Vychodoslovenske Zeleziarne AS ....................... Metals & Mining 20,000 97,217
-----------
640,940
-----------
SOUTH AFRICA 7.7%
Amalgamated Banks of South Africa Ltd. ............... Banking 14,800 70,192
Anglo American Gold Investment Co. Ltd. .............. Metals & Mining 1,700 63,576
Anglo American Industrial Corp. Ltd. ................. Multi-Industry 65,155 991,266
Anglo-American Corp. of South Africa Ltd. ............ Metals & Mining 31,500 887,799
Barlow Ltd. .......................................... Multi-Industry 194,000 745,298
CG Smith Ltd. ........................................ Multi-Industry 600,000 1,361,608
De Beers/Centenary Linked Units ...................... Misc Materials & Commodities 64,400 821,045
Iscor Ltd. ........................................... Metals & Mining 3,395,912 611,902
Liberty Life Association of Africa Ltd. .............. Insurance 41,900 576,924
Nedcor Ltd. .......................................... Financial Services 3,500 59,615
Palabora Mining Co. Ltd. ............................. Metals & Mining 114,000 629,807
Rembrandt Group Ltd. ................................. Multi-Industry 156,170 955,696
Reunert Ltd. ......................................... Electrical & Electronics 63,300 88,234
Sappi Ltd. ........................................... Forest Products & Paper 305,851 1,182,799
Sasol Ltd. ........................................... Energy Sources 336,000 1,270,834
South African Breweries Ltd. ......................... Beverages & Tobacco 94,370 1,589,744
Tiger Oats Ltd. ...................................... Food & Household Products 9,700 95,636
Tongaat-Hulett Group Ltd. ............................ Multi-Industry 82,443 539,553
Voltex Holdings Ltd. ................................. Electrical & Electronics 27,381 9,309
-----------
12,550,837
-----------
SOUTH KOREA 3.9%
BYC Co. Ltd. ......................................... Textiles & Apparel 2,760 105,580
(a)Cho Hung Bank Co. Ltd., GDR, Reg S ................... Banking 54,000 51,300
(a)Daegu Bank Co. Ltd. .................................. Banking 17,498 62,571
Daewoo Electric Components Co. Ltd. .................. Electronic Components & Instruments 9,000 37,422
Hana Bank ............................................ Banking 12,535 138,641
Hana Bank, GDR, Reg S ................................ Banking 82,687 1,039,789
(a)Hotel Shilla Co. ..................................... Leisure & Tourism 13,240 78,174
Korea Electric Power Corp. ........................... Utilities Electrical & Gas 74,900 1,856,150
Saehan Precision Co. Ltd. ............................ Electrical & Electronics 4,234 66,899
Samsung Display Devices Ltd. ......................... Electrical & Electronics 26,266 1,295,280
Samsung Electronics Co. Ltd. ......................... Electrical & Electronics 4,275 286,896
(a)Samsung Heavy Industries Co. Ltd. .................... Machinery & Engineering 94,984 540,283
Shin Poong Paper Manufacturing Co. Ltd. .............. Forest Products & Paper 5,521 45,683
Shin Young Wocoal Inc. ............................... Textiles & Apparel 1,610 59,178
Sindo Ricoh Co. ...................................... Appliances & Household Durables 3,980 142,651
(a)Tong Yang Merchant Bank .............................. Financial Services 88,915 505,762
-----------
6,312,259
-----------
SRI LANKA .2%
National Development Bank of Sri Lanka ............... Banking 130,000 243,168
-----------
THAILAND 8.0%
Advanced Info Service Public Co. Ltd., fgn. .......... Telecommunications 87,300 518,971
(a)American Standard Sanitaryware (THB) PUB Co. Ltd. fgn. Building Materials & Components 30,800 230,989
Ayudhya Insurance Public Co. Ltd., fgn. .............. Insurance 44,100 154,747
(a)Bangkok Bank Public Co. Ltd. ......................... Banking 922,400 1,320,072
</TABLE>
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COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
THAILAND (CONT.)
(a)Bangkok Expressway Public Co. Ltd., fgn. ............ Transportation 101,000 $ 101,459
Bangkok Insurance Public Co. Ltd. ................... Insurance 37,000 137,471
Bangkok Insurance Public Co. Ltd., fgn. ............. Insurance 4,900 23,634
BEC World Public Co Ltd., fgn. ...................... Telecommunications 20,000 110,087
(a)Charoen Pokphand Feedmill Public Co. Ltd. ........... Food & Household Products 133,776 162,917
(a)Charoen Pokphand Feedmill Public Co. Ltd., fgn. ..... Food & Household Products 331,224 405,655
(a)Dusit Thani Public Company Ltd., fgn. ............... Leisure & Tourism 74,500 78,693
(a)Hana Microelectronics Co. Ltd., fgn. ................ Electrical & Electronics 160,400 388,474
(a)Hua Thai Manufacturing Public Co. Ltd., fgn. ........ Textiles & Apparel 16,000 26,641
Industrial Finance Corp. of Thailand ................ Financial Services 167,000 67,793
Industrial Finance Corp. of Thailand, fgn. .......... Financial Services 1,358,700 560,905
(a)Italian-Thai Development Public Co. Ltd., fgn. ...... Construction & Housing 109,700 220,396
(a)Jasmine International Public Co. Ltd., fgn. ......... Telecommunications 667,000 167,048
(a)Karat Sanitaryware Public Co. Ltd., fgn. ............ Building Materials & Components 39,683 4,369
(a)Regional Container Lines Public Co. Ltd. ............ Transportation 17,992 9,408
Regional Container Lines Public Co. Ltd., fgn. ...... Transportation 294,008 145,649
Saha Pathanapibul Public Co. Ltd., fgn. ............. Food & Household Products 80,700 82,177
Saha Union Public Co. Ltd., fgn. .................... Multi-Industry 476,300 199,906
(a)Serm Suk Public Co. Ltd. ............................ Food & Household Products 46,300 236,374
(a)Siam Cement Public Co. Ltd. ......................... Building Materials & Components 68,100 1,049,567
(a)Siam Commercial Bank Ltd., fgn. ..................... Banking 106,800 63,930
Siam Makro Public Company Ltd., fgn. ................ Merchandising 376,000 734,719
(a)Thai Airways International Public Co. Ltd., fgn. .... Transportation 519,700 672,242
(a)Thai Asahi Glass Public Co. Ltd. .................... Building Materials & Components 102,510 18,056
(a)Thai Farmers Bank Public Co. Ltd. ................... Banking 1,988,200 2,927,445
(a)Thai Farmers Bank Public Co. Ltd., fgn. ............. Banking 565,800 996,593
(a)Thai Petrochemical Industry Public Co. Ltd., fgn. ... Chemicals 469,520 77,532
Thai Rayon Public Co. Ltd. .......................... Textiles & Apparel 41,906 41,231
Thai Rayon Public Co. Ltd., fgn. .................... Textiles & Apparel 3,394 3,339
Thai Wacoal Public Co. Ltd., fgn. ................... Textiles & Apparel 8,200 9,704
(a)Total Access Communication Public Co. Ltd. .......... Telecommunications 415,000 713,800
(a)United Communications Industries, fgn. .............. Telecommunications 509,700 273,542
-----------
12,935,535
-----------
TURKEY 5.5%
Akbank .............................................. Banking 222,995,556 4,524,957
Alarko Sanayii ve Ticaret SA ........................ Appliances & Household Durables 3,833,998 173,223
(a)Alcatel Teletas ..................................... Telecommunications 1,482,000 62,259
(a)Anadolu Anonim Turk Sigorta Sirketi, Br. ............ Insurance 18,049,000 208,874
Arcelik AS, Br. ..................................... Appliances & Household Durables 12,151,456 350,597
Beko Elektronik AS .................................. Appliances & Household Durables 6,561,005 86,329
Erciyas Biracilik ................................... Food & Household Products 2,386,000 158,865
(a)Eregli Demir ve Celik Fabrikalari AS ................ Metals & Mining 11,013,000 453,928
Haci Omer Sabanci Holding AS, ADR, 144A ............. Multi-Industry 384,200 1,440,750
(a)Netas Northern Electric Telekomunic Asyon AS ........ Electrical & Electronics 5,781,000 106,309
Petkim Petrokimya Holding AS ........................ Chemicals 182,000 82,229
Tat Konserve Sanayii AS ............................. Food & Household Products 3,970,928 141,639
(a)Tofas Turk Otomobil Fabrikasi AS .................... Automobiles 21,581,035 195,009
(a)Turkiye Garanti Bankasi AS .......................... Banking 34,037,662 841,768
(a)Turkiye Is Bankasi AS, C ............................ Banking 2,888,000 75,084
-----------
8,901,820
-----------
VENEZUELA 2.4%
Ceramica Carabobo CA, A ............................. Building Materials & Components 330,484 27,808
Ceramica Carabobo CA, A, ADR ........................ Building Materials & Components 29,950 25,201
Compania Anonima Nacional Telefonos de Venezuela, ADR Telecommunications 47,000 837,188
Electricidad de Caracas SAICA SACA .................. Utilities Electrical & Gas 2,874,842 1,241,085
(a)Manufacturera de Aparatos Domesticos Madoda SA, A ... Appliances & Household Durables 10,000 3,525
Mavesa SA, ADR ...................................... Food & Household Products 326,800 1,225,500
Siderurgica Venezolana Sivensa Saica Services, ADR, A Metals & Mining 34,708 162,471
</TABLE>
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- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
VENEZUELA (CONT.)
Venezolana de Cementos-Vencemos, #1 .................... Building Materials & Components 333,151 $ 218,361
Venezolana de Cementos-Vencemos, #2 .................... Building Materials & Components 348,826 231,725
------------
3,972,864
------------
TOTAL INVESTMENTS (COST $228,078,693) 99.7% ............ 161,884,954
OTHER ASSETS, LESS LIABILITIES .3% ..................... 548,333
------------
TOTAL NET ASSETS 100.0% ................................ $162,433,287
============
</TABLE>
(a)Non-income producing.
See notes to financial statements.
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TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 58.7%
AEROSPACE & MILITARY TECHNOLOGY 4.1%
Alvis Plc .................................... United Kingdom 140,990 $ 457,417
Boeing Co. ................................... United States 21,217 692,205
Hong Kong Aircraft Engineering Co. Ltd. ...... Hong Kong 363,200 496,940
Kaman Corp., A ............................... United States 40,300 647,319
Raytheon Co., A .............................. United States 17,615 910,475
Rolls-Royce Plc .............................. United Kingdom 25,276 104,502
----------
3,308,858
----------
APPLIANCES & HOUSEHOLD DURABLES .6%
Laox Co. Ltd. ................................ Japan 70,000 515,071
----------
AUTOMOBILES .2%
General Motors Corp. ......................... United States 2,700 193,219
----------
BANKING 1.7%
(a)Bangkok Bank Public Co. Ltd., fgn ............ Thailand 312,000 644,007
Banque Nationale de Paris .................... France 9,193 757,334
----------
1,401,341
----------
BUILDING MATERIALS & COMPONENTS 1.5%
Caradon Plc .................................. United Kingdom 295,300 501,133
Gujarat Ambuja Cements Ltd. .................. India 35,600 217,891
Gujarat Ambuja Cements Ltd., GDR, 144A ....... India 14,600 96,360
Plettac AG ................................... Germany 5,192 411,470
----------
1,226,854
BUSINESS & PUBLIC SERVICES .8%
Columbia HCA Healthcare Corp. ................ United States 13,600 336,600
(a)Humana Inc. .................................. United States 18,200 324,188
----------
660,788
----------
CHEMICALS 1.1%
Beijing Yanhua Petrochemical Company Ltd., ADR China 69,740 278,960
Rhone-Poulenc SA, A .......................... France 9,870 508,147
Shanghai Petrochemical Co. Ltd., H ........... China 834,000 75,356
----------
862,463
----------
DATA PROCESSING & REPRODUCTION 1.4%
(a)3Com Corp. ................................... United States 25,400 1,138,238
ELECTRICAL & ELECTRONICS 3.3%
General Electric Co. Plc ..................... United Kingdom 184,900 1,661,193
Motorola Inc. ................................ United States 4,310 263,179
Philips Electronics NV ....................... Netherlands 11,300 758,672
----------
2,683,044
----------
ENERGY EQUIPMENT & SERVICES .8%
Sunoco Inc. .................................. United States 17,500 631,094
ENERGY SOURCES .8%
MOL Magyar Olay-Es Gazipari RT, GDS, 144A .... Hungary 12,107 334,456
Rao Gazprom, Reg S, ADR ...................... Russia 14,201 120,353
Societe Elf Aquitaine SA, br. ................ France 1,805 208,734
----------
663,543
FINANCIAL SERVICES 2.4%
Axa-UAP ...................................... France 11,271 1,634,297
ING Groep NV ................................. Netherlands 5,146 313,964
(a)Waddell & Reed Financial Inc. ................ United States 1,274 30,178
----------
1,978,439
----------
</TABLE>
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<TABLE>
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TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS 2.2%
Archer-Daniels Midland Co. ......................... United States 29,547 $ 507,839
IBP Inc. ........................................... United States 43,300 1,261,113
----------
1,768,952
----------
FOREST PRODUCTS & PAPER 1.2%
Cartiere Burgo SpA ................................. Italy 34,500 223,201
Georgia Pacific Corp. .............................. United States 2,500 146,406
Mo Och Domsjoe AB, B ............................... Sweden 9,575 208,491
(a)Repap Enterprises Inc. ............................. Canada 4,876,190 269,841
Stora Enso OY, R ................................... Finland 10,000 100,723
----------
948,662
----------
INDUSTRIAL COMPONENTS 2.1%
BTR Plc ............................................ United Kingdom 347,993 712,139
Goodyear Tire & Rubber Co. ......................... United States 3,600 181,575
Madeco Manufacturera de Cobre SA, ADR .............. Chile 18,685 156,487
Weir Group Plc ..................................... United Kingdom 123,370 410,515
Yamato Kogyo Co. Ltd. .............................. Japan 37,000 214,521
----------
1,675,237
----------
INSURANCE 9.1%
Ace Ltd. ........................................... Bermuda 25,200 867,825
HIH Insurance Ltd. ................................. Australia 467,961 619,972
National Mutual Asia Ltd. .......................... Hong Kong 489,000 366,091
Partnerre Ltd. ..................................... Bermuda 17,500 800,625
Reinsurance Australia Corp. Ltd. ................... Australia 365,191 560,199
SCOR SA ............................................ France 18,000 1,190,613
Torchmark Corp. .................................... United States 22,400 791,000
UNUM Corp. ......................................... United States 18,530 1,081,689
Waddell & Reed Financial Inc. ...................... United States 5,485 127,526
Zurich Allied AG ................................... Switzerland 1,390 1,029,217
----------
7,434,757
----------
LEISURE & TOURISM .4%
Mandarin Oriental International Ltd. ............... Singapore 524,000 330,120
MACHINERY & ENGINEERING 1.6%
Makita Corp. ....................................... Japan 59,000 658,520
Mckechnie Group Plc ................................ United Kingdom 101,800 610,580
----------
1,269,100
----------
MERCHANDISING 1.7%
Best Denki Co. Ltd. ................................ Japan 24,000 181,915
David Jones Ltd. ................................... Australia 345,909 381,894
Hudson's Bay Co. ................................... Canada 20,200 254,473
Matsuzakaya Co. Ltd. ............................... Japan 115,000 602,527
----------
1,420,809
----------
METALS & MINING 2.7%
Angang New Steel Company Ltd., H, 144A ............. China 2,022,000 138,328
Anglo American Platinum Corp. Ltd. ................. South Africa 402 5,515
Companhia Siderurgica Nacional Sid Nacional CSN .... Brazil 16,300,000 364,246
Companhia Siderurgica Nacional Sid Nacional CSN, ADR Brazil 7,700 173,250
Elkem ASA, A ....................................... Norway 49,700 593,608
Industrias Penoles SA .............................. Mexico 168,200 510,212
Pohang Iron & Steel Co. Ltd. ....................... South Korea 6,690 426,122
----------
2,211,281
----------
</TABLE>
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<TABLE>
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TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 6.1%
Alfa SA de CV, A ......................... Mexico 127,251 $ 358,336
Broken Hill Proprietary Co. Ltd. ......... Australia 75,894 559,480
Cheung Kong Holdings Ltd. ................ Hong Kong 172,000 1,237,730
Elementis Plc ............................ United Kingdom 79,859 110,943
Hunting Plc .............................. United Kingdom 261,410 537,129
Hutchison Whampoa Ltd. ................... Hong Kong 79,000 558,295
Pilkington Plc ........................... United Kingdom 454,300 449,727
(a)Saab AB, B ............................... Sweden 54,400 570,456
Swire Pacific Ltd., B .................... Hong Kong 945,000 628,191
-----------
5,010,287
-----------
REAL ESTATE 2.2%
Highwood Properties Inc. ................. United States 16,600 427,450
Hon Kwok Land Investment Co. Ltd. ........ Hong Kong 1,226,456 115,565
(a)Intrawest Corp. .......................... Canada 15,200 255,807
Rouse Co. ................................ United States 13,500 371,250
Summit Properties Inc. ................... United States 15,000 258,750
Union du Credit Bail Immobilier Unibail .. France 2,500 364,738
-----------
1,793,560
-----------
RECREATION & OTHER CONSUMER GOODS .4%
Yue Yuen Industrial (Holdings) Ltd. ...... Hong Kong 190,140 365,689
-----------
TELECOMMUNICATIONS 2.0%
Hong Kong Telecommunications Ltd. ........ Hong Kong 436,000 762,567
Rostelecom, ADR .......................... Russia 25,300 105,944
Telecom Argentina Stet-France SA, ADR .... Argentina 4,000 110,000
Telefonica de Argentina SA, B, ADR ....... Argentina 13,120 366,540
Telefonos de Mexico SA (Telmex), L, ADR .. Mexico 6,709 326,644
-----------
1,671,695
-----------
TEXTILES & APPAREL .4%
(a)Fruit of the Loom Inc., A ................ United States 12,450 171,966
(a)Yizheng Chemical Fibre Co. Ltd., H ....... China 1,332,000 122,072
-----------
294,038
-----------
TRANSPORTATION 4.2%
British Airways Plc ...................... United Kingdom 71,020 480,911
Danzas Holding AG ........................ Switzerland 2,300 971,241
Great Eastern Shipping Co. Ltd., GDR, 144A India 86,700 249,263
(a)Landstar System Inc. ..................... United States 13,000 529,750
Sea Containers Ltd., A ................... United Kingdom 7,000 209,563
Singapore Airlines Ltd., fgn ............. Singapore 102,000 748,000
Tranz Rail Holdings Ltd., ADR ............ New Zealand 40,380 272,565
-----------
3,461,293
-----------
UTILITIES ELECTRICAL & GAS 3.7%
Entergy Corp. ............................ United States 30,200 939,975
Hong Kong Electric Holdings Ltd. ......... Hong Kong 130,000 394,333
Korea Electric Power Corp. ............... South Korea 39,730 984,577
Mosenergo, ADR ........................... Russia 21,297 39,932
Mosenergo, ADR, 144A ..................... Russia 30,000 60,000
National Grid Group Plc .................. United Kingdom 79,730 634,073
-----------
3,052,890
-----------
TOTAL COMMON STOCKS (COST $48,842,771) ... 47,971,322
-----------
</TABLE>
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<TABLE>
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- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 1.7%
Banco Bradesco SA BBD, pfd ............................ Brazil 121,758,350 $ 675,176
(a)Banco Bradesco SA BBD, rts., pfd ...................... Brazil 5,046,779 2,874
Cia Energetica de Minas Gerais Cemig, ADR, pfd ........ Brazil 9,178 174,716
Cia Vale do Rio Doce, A, pfd .......................... Brazil 13,400 171,902
Cia Vale do Rio Doce, A, ADR, pfd ..................... Brazil 15,100 193,710
Coteminas Cia Tecidos Norte de Minas, pfd ............. Brazil 599,000 64,449
Empresa Nacional de Comercio Redito Participacoe, pfd . Brazil 275,000 410
Intrawest Corp., pfd .................................. Canada 10,273 12,039
Usinas Siderugicas de Minas Gerais, ADR, pfd .......... Brazil 28,300 62,538
----------
TOTAL PREFERRED STOCKS (COST $2,443,217) .............. 1,357,814
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------------
<S> <C> <C> <C>
BONDS 32.5%
Bepensa SA, 144A, 9.75%, 9/30/04 ...................... Mexico $ 110,000 101,750
Bridas Corp., Yankee, 12.50%, 11/18/99 ................ Argentina 100,000 102,500
Buoni Poliennali Del Tesoro:
10.50%, 7/15/00 .................................... Italy 1,125,000,000 ITL 749,117
7.75%, 11/01/06 .................................... Italy 1,400,000,000 ITL 1,058,740
Cemex SA, 144A, 10.75%, 7/15/00 ....................... Mexico 200,000 204,000
Fannie Mae, 6.00%, 5/15/08 ............................ United States 465,000 491,536
Federal Republic of Germany, 5.25%, 2/21/01 ........... Germany 1,200,000 DEM 751,585
Government of Australia, 6.75%, 11/15/06 .............. Australia 1,205,000 AUD 825,545
Government of Belgium, 6.25%, 3/28/07 ................. Belgium 27,350,000 BEF 923,111
Government of Canada:
9.00%, 12/01/04 .................................... Canada 1,315,000 CAD 1,037,292
10.25%, 3/15/14 .................................... Canada 295,000 CAD 296,911
9.00%, 6/01/25 ..................................... Canada 245,000 CAD 244,451
Government of Italy, cvt., 5.00%, 6/28/01 ............. Italy 890,000 1,665,413
Government of New Zealand:
6.50%, 2/15/00 ..................................... New Zealand 610,000 NZD 327,221
7.00%, 7/15/09 ..................................... New Zealand 540,000 NZD 320,102
Hypothekenbank In Essen AG, 5.25%, 1/22/08 ............ Germany 2,430,000 DEM 1,562,226
Kingdom of Denmark, 7.00%, 12/15/04 ................... Denmark 3,000,000 DKK 543,436
Kingdom of Sweden, 10.25%, 5/05/03 .................... Sweden 5,000,000 SEK 777,167
Phillipine Long Distance Telephone Co., 9.25%, 6/30/06 Philippines 270,000 258,525
Poland Communications Inc., 9.875%, 11/01/03 .......... Poland 400,000 348,000
Protexa Construcciones SA de CV, 144A, 12.125%, 7/24/02 Mexico 100,000 80,000
PT Indah Kiat Finance Mauritius Ltd., 10.00%, 7/01/07 . Indonesia 300,000 163,500
Republic of Argentina, Reg S, 11.75%, 2/12/07 ......... Argentina 100,000 ARS 85,702
Republic of Ecuador:
Reg S, 11.25%, 4/25/02 ............................. Ecuador 450,000 416,250
144A, 11.25%, 4/25/02 .............................. Ecuador 275,000 254,375
Republic of Peru, FRN, 4.00%, 3/07/17 ................. Peru 80,000 50,600
Republic of Turkey, Reg S, 9.875%, 2/23/05 ............ Turkey 35,000 30,820
Republic of Venezuela:
Reg S, 9.125%, 6/18/07 ............................. Venezuela 600,000 421,500
144A, 9.125%, 6/18/07 .............................. Venezuela 100,000 70,250
Sei Holdings IX Inc., 144A, 11.00%, 11/30/00 .......... Trinidad and Tobago 170,000 175,100
U. S. Treasury Bond, 5.25%, 11/15/28 .................. United States 2,287,000 2,344,885
U.S. Treasury Notes:
8.50%, 2/15/00 ..................................... United States 880,000 916,300
6.25%, 8/31/00 ..................................... United States 1,010,000 1,035,881
4.625%, 11/30/00 ................................... United States 3,495,000 3,498,278
7.25%, 8/15/04 ..................................... United States 576,000 648,000
6.125%, 11/15/27 ................................... United States 479,000 536,630
</TABLE>
132
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
United Kingdom:
6.50%, 12/07/03 ................................................. United Kingdom $ 880,000 GBP $ 1,603,546
7.50%, 12/07/06 ................................................. United Kingdom 280,000 GBP 558,090
United Mexican States:
9.75%, 2/06/01 .................................................. Mexico 620,000 636,275
11.375%, 9/15/16 ................................................ Mexico 430,000 447,200
------------
TOTAL BONDS (COST $25,790,601) ..................................... 26,561,810
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $77,076,589) .. 75,890,946
------------
(g)REPURCHASE AGREEMENTS 6.4%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $2,501,319)
Collateralized by U.S. Treasury Notes & Bonds ..................... United States 2,500,000 2,500,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $2,712,401)
Collateralized by U.S. Treasury Notes & Bonds ..................... United States 2,711,000 2,711,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $5,211,000) ...................... 5,211,000
------------
TOTAL INVESTMENTS (COST $82,287,589) 99.3% ......................... 81,101,946
NET EQUITY IN FORWARD CONTRACTS .................................... (836)
OTHER ASSETS, LESS LIABILITIES .7% ................................. 568,508
------------
TOTAL NET ASSETS 100.0% ............................................. $ 81,669,618
------------
</TABLE>
See currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income producing.
(g)See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
133
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 89.7%
AEROSPACE & MILITARY TECHNOLOGY 3.2%
Boeing Co. ................................................................... United States 210,769 $ 6,876,339
(a) Fairchild Corp., A ........................................................... United States 204,957 3,228,073
(a) General Motors Corp., H ...................................................... United States 66,000 2,619,375
Raytheon Co., A .............................................................. United States 222,644 11,507,912
------------
24,231,699
APPLIANCES & HOUSEHOLD DURABLES .3% ------------
Laox Co. Ltd. ................................................................ Japan 329,000 2,420,833
------------
AUTOMOBILES 4.6%
Autoliv Inc., SDR ............................................................ Sweden 246,100 8,835,044
Fiat SpA ..................................................................... Italy 1,919,720 6,666,285
Ford Motor Co. ............................................................... United States 90,000 5,281,875
General Motors Corp. ......................................................... United States 60,000 4,293,750
Volkswagen AG ................................................................ Germany 63,000 5,098,703
Volvo AB, B .................................................................. Sweden 171,900 3,944,509
------------
34,120,166
------------
BANKING 3.3%
Alpha Credit Bank ............................................................ Greece 50,369 5,255,426
Alpha Credit Bank, 144A ...................................................... Greece 8,147 850,046
Guoco Group Ltd. ............................................................. Hong Kong 1,633,000 2,750,737
HSBC Holdings Plc. ........................................................... Hong Kong 354,924 8,841,890
(a) Kookmin Bank ................................................................. South Korea 293,927 2,397,858
(a) Shinhan Bank Co. Ltd. ........................................................ South Korea 169,682 1,298,188
Singapore Finance Ltd., fgn. ................................................. Singapore 1,141,000 1,044,188
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 149,000 2,151,188
------------
24,589,521
------------
BROADCASTING & PUBLISHING .7%
Houghton Mifflin Co. ......................................................... United States 105,600 4,989,600
------------
BUILDING MATERIALS & COMPONENTS 2.8%
Caradon Plc. ................................................................. United Kingdom 2,752,600 4,671,245
Nichiha Corp. ................................................................ Japan 193,500 1,768,604
Okumura Corp. ................................................................ Japan 2,093,000 9,296,037
Owens Corning ................................................................ United States 100,600 3,565,013
(a) Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 771,063 1,729,507
------------
21,030,406
------------
BUSINESS & PUBLIC SERVICES 1.0%
(a) Humana Inc. .................................................................. United States 250,000 4,453,125
Lex Service Plc. ............................................................. United Kingdom 466,666 2,965,917
------------
7,419,042
------------
CHEMICALS .4%
European Vinyls Corporation Evc International NV ............................. Netherlands 56,500 448,580
Kemira OY .................................................................... Finland 395,500 2,850,999
------------
3,299,579
------------
CONSTRUCTION & HOUSING .3%
Daito Trust Construction Co. Ltd. ............................................ Japan 274,700 2,384,143
------------
DATA PROCESSING & REPRODUCTION 1.6%
(a) 3Com Corp. ................................................................... United States 220,600 9,885,638
(a) Newbridge Networks Corp. ..................................................... Canada 74,000 2,247,750
------------
12,133,388
------------
ELECTRICAL & ELECTRONICS 4.1%
ABB AB, A .................................................................... Sweden 350,000 3,734,980
Alcatel SA, ADR .............................................................. France 69,112 1,688,925
Catic Shenzhen Holdings Ltd., H .............................................. China 9,945,000 596,912
</TABLE>
134
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS (CONT.)
Dongfang Electrical Machinery Co. Ltd., H .................................... China 5,506,000 $ 326,924
General Electric Co. Plc. .................................................... United Kingdom 1,160,300 10,424,457
Hitachi Ltd. ................................................................. Japan 603,500 3,745,124
Matsushita Electric Industrial Co. Ltd. ...................................... Japan 200,000 3,544,326
Motorola Inc. ................................................................ United States 100,000 6,106,250
------------
30,167,898
------------
ELECTRONIC COMPONENTS & INSTRUMENTS .3%
BICC Plc. .................................................................... United Kingdom 1,397,152 1,638,786
(a) Nanjing Panda Electronics Co. Ltd., H ........................................ China 17,794,000 803,885
------------
2,442,671
------------
ENERGY SOURCES 4.5%
MOL Magyar Olay-Es Gazipari RT, GDS, 144A .................................... Hungary 256,358 7,081,890
Norsk Hydro AS ............................................................... Norway 117,000 3,923,546
(a) Petron Corp. ................................................................. Philippines 8,101,033 885,074
(a) Ranger Oil Ltd. .............................................................. Canada 273,050 1,208,815
(a) Renaissance Energy Ltd. ...................................................... Canada 254,800 2,894,701
Shell Transport & Trading Co. Plc. ........................................... United Kingdom 608,900 3,728,063
Societe Elf Aquitaine SA, Br. ................................................ France 41,972 4,853,731
Valero Energy Corp., new ..................................................... United States 81,000 1,721,250
YPF Sociedad Anonima, ADR .................................................... Argentina 257,700 7,199,494
------------
33,496,564
------------
FINANCIAL SERVICES 4.0%
Axa-UAP ...................................................................... France 92,702 13,441,807
ICICI Ltd., GDR, 144A ........................................................ India 396,700 2,638,055
ING Groep NV ................................................................. Netherlands 105,188 6,417,662
Morgan Stanley Dean Witter & Co. ............................................. United States 103,100 7,320,100
------------
29,817,624
------------
FOOD & HOUSEHOLD PRODUCTS 3.3%
Archer-Daniels Midland Co. ................................................... United States 625,065 10,743,305
IBP Inc. ..................................................................... United States 272,543 7,937,815
Northern Foods Plc. .......................................................... United Kingdom 2,208,797 5,163,231
Showa Sangyo Co. ............................................................. Japan 506,000 1,067,624
------------
24,911,975
------------
FOREST PRODUCTS & PAPER 3.1%
(a) Asia Pacific Resources International Hldgs. Ltd., A .......................... Indonesia 534,975 367,795
Assidomaen AB ................................................................ Sweden 192,100 3,033,482
Carter Holt Harvey Ltd. ...................................................... New Zealand 940,712 844,784
Georgia Pacific Corp. ........................................................ United States 34,000 1,991,125
Georgia Pacific Timber Group ................................................. United States 34,000 809,625
Metsa Serla OY, B ............................................................ Finland 270,000 2,159,616
Munksjo AB ................................................................... Sweden 722,500 4,991,488
Primex Forest Products Ltd. .................................................. Canada 195,000 774,414
Stora Enso OY, R ............................................................. Finland 559,700 5,637,457
UPM-Kymmene Corp. ............................................................ Finland 88,000 2,467,907
------------
23,077,693
------------
HEALTH & PERSONAL CARE 2.4%
Medeva Plc. .................................................................. United Kingdom 1,614,200 2,846,771
Nycomed Amersham Plc. ........................................................ United Kingdom 140,690 978,681
Pacific Chemical Co. Ltd. .................................................... South Korea 100,000 1,613,306
Pharmacia & Upjohn Inc. ...................................................... United States 218,900 12,395,213
------------
17,833,971
------------
</TABLE>
135
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL COMPONENTS 1.5%
BTR Plc. ..................................................................... United Kingdom 4,101,275 $ 8,392,926
BTR Plc., fgn. ............................................................... United Kingdom 109,687 215,285
Yamato Kogyo Co. Ltd. ........................................................ Japan 466,000 2,701,809
------------
11,310,020
------------
INSURANCE 5.7%
Ace Ltd. ..................................................................... Bermuda 121,500 4,184,156
HIH Insurance Ltd. ........................................................... Australia 2,244,429 2,973,501
Partnerre Ltd. ............................................................... Bermuda 127,900 5,851,425
Reliastar Financial Corp. .................................................... United States 48,000 2,214,000
Torchmark Corp. .............................................................. United States 240,000 8,475,000
UNUM Corp. ................................................................... United States 81,100 4,734,213
Zurich Allied AG ............................................................. Switzerland 19,500 14,438,660
------------
42,870,955
------------
LEISURE & TOURISM .9%
Kuoni Reisen Holding AG, B ................................................... Switzerland 1,710 6,785,220
------------
MACHINERY & ENGINEERING 2.9%
First Tractor Company Ltd., H ................................................ China 6,860,000 1,567,292
Laird Group Plc. ............................................................. United Kingdom 1,783,700 4,881,768
Makita Corp. ................................................................. Japan 653,000 7,288,360
VA Technologie AG ............................................................ Austria 25,900 2,245,563
Valmet (OY) .................................................................. Finland 392,800 5,275,191
------------
21,258,174
------------
MERCHANDISING 2.6%
Best Denki Co. Ltd. .......................................................... Japan 65,000 492,686
Coles Myer Ltd. .............................................................. Australia 1,070,971 5,616,326
Matsuzakaya Co. Ltd. ......................................................... Japan 51,000 267,207
Sa des Galeries Lafayette .................................................... France 5,388 5,787,118
Safeway Plc. ................................................................. United Kingdom 231,198 1,153,009
(a) Sobeys Canada Inc. ........................................................... Canada 174,886 1,935,587
W.H. Smith Group ............................................................. United Kingdom 513,810 4,103,299
------------
19,355,232
------------
METALS & MINING 4.9%
Anglo American Platinum Corp. Ltd. ........................................... South Africa 377,265 5,175,349
Boehler-Uddeholm AG .......................................................... Austria 93,200 4,340,118
Chongqing Iron & Steel Ltd., H ............................................... China 9,783,000 479,853
Companhia Siderurgica Nacional Sid Nacional CSN .............................. Brazil 129,100,000 2,884,916
Industrias Penoles SA ........................................................ Mexico 930,000 2,821,031
Iscor Ltd. ................................................................... South Africa 9,558,700 1,722,361
Outokumpu OY, A .............................................................. Finland 342,200 3,176,403
Pechiney SA, A ............................................................... France 84,279 2,753,378
Pechiney SA, ADR ............................................................. France 112,708 1,817,417
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 100,000 6,369,543
(a) RGC Ltd. ..................................................................... Australia 1,074,643 1,812,614
WMC Ltd. ..................................................................... Australia 1,040,856 3,140,973
------------
36,493,956
------------
MULTI-INDUSTRY 6.2%
Beijing Datang Power Generation Co. Ltd., H .................................. China 6,860,000 2,058,731
Broken Hill Proprietary Co. Ltd. ............................................. Australia 564,031 4,157,955
Cheung Kong Holdings Ltd. .................................................... Hong Kong 1,180,000 8,491,400
Hutchison Whampoa Ltd. ....................................................... Hong Kong 1,523,000 10,763,077
Jardine Strategic Holdings Ltd. .............................................. Hong Kong 800,000 1,160,000
La Cemento Nacional CA, GDR, 144A ............................................ Ecuador 3,600 388,800
La Cemento Nacional SA, GDR, Reg S ........................................... Ecuador 400 43,200
Pacific Dunlop Ltd. .......................................................... Australia 2,149,000 3,479,756
</TABLE>
136
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY (CONT.)
a Saab AB, B ................................................................... Sweden 296,997 $ 3,114,405
Saha Union Public Co. Ltd., fgn. ............................................. Thailand 4,138,400 1,736,909
Swire Pacific Ltd., A ........................................................ Hong Kong 2,292,000 10,265,888
Swire Pacific Ltd., B ........................................................ Hong Kong 1,304,000 866,837
------------
46,526,958
------------
REAL ESTATE 5.1%
China Resources Beijing Land Ltd. ............................................ China 4,652,000 1,158,909
General Growth Properties .................................................... United States 164,500 6,230,438
Hang Lung Development Co. Ltd. ............................................... Hong Kong 3,624,000 3,882,565
Highwood Properties Inc. ..................................................... United States 164,900 4,246,175
Intrawest Corp. .............................................................. Canada 119,700 2,014,482
Inversiones y Representacion SA .............................................. Argentina 1,156,326 3,171,187
Inversiones y Representacion SA, GDR ......................................... Argentina 2,374 66,014
National Health Investors Inc. ............................................... United States 123,400 3,046,438
New World Development Co. Ltd. ............................................... Hong Kong 1,639,000 4,125,399
Rouse Co. .................................................................... United States 80,000 2,200,000
Union du Credit Bail Immobilier Unibail ...................................... France 32,029 4,672,879
Weeks Corp. .................................................................. United States 115,000 3,241,563
------------
38,056,049
------------
RECREATION & OTHER CONSUMER GOODS .1%
Fila Holding SpA, ADR ........................................................ Italy 60,600 469,650
------------
TELECOMMUNICATIONS 3.6%
AT&T Corp. ................................................................... United States 60,300 4,537,575
Hong Kong Telecommunications Ltd. ............................................ Hong Kong 4,420,546 7,731,569
Northern Telecom, Ltd. ....................................................... Canada 138,000 6,917,250
PT Indosat, ADR .............................................................. Indonesia 31,100 379,031
Telecom Argentina Stet-France SA, ADR ........................................ Argentina 100,000 2,750,000
Telefonos de Mexico SA (Telmex), L, ADR ...................................... Mexico 92,900 4,523,069
------------
26,838,494
------------
TEXTILES & APPAREL .8%
Courtaulds Textiles Plc. ..................................................... United Kingdom 734,300 1,918,062
Dawson International Plc. .................................................... United Kingdom 1,434,880 286,475
a Fruit of the Loom Inc., A .................................................... United States 136,500 1,885,406
Tae Kwang Industrial Co. Ltd. ................................................ South Korea 1,000 338,462
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 13,356,000 1,224,016
------------
5,652,421
------------
TRANSPORTATION 5.0%
British Airways Plc. ......................................................... United Kingdom 1,013,532 6,863,115
Danzas Holding AG ............................................................ Switzerland 30,110 12,714,816
Helikopter Services Group ASA ................................................ Norway 101,300 478,645
Koninklijke Frans Maas Groep NV .............................................. Netherlands 160,970 4,931,942
Koninklijke Nedlloyd Groep NV ................................................ Netherlands 260,670 3,541,901
a Landstar System Inc. ......................................................... United States 48,900 1,992,675
Singapore Airlines Ltd., fgn. ................................................ Singapore 944,600 6,927,067
------------
37,450,161
------------
UTILITIES ELECTRICAL & GAS 10.5%
Bses Ltd., GDR, 144A ......................................................... India 202,200 2,578,050
Electrabel SA ................................................................ Belgium 40,900 17,977,368
Entergy Corp. ................................................................ United States 283,900 8,836,388
a Evn AG ....................................................................... Austria 35,400 5,014,678
Hong Kong Electric Holdings Ltd. ............................................. Hong Kong 2,944,000 8,930,137
Iberdrola SA, Br. ............................................................ Spain 744,700 13,953,709
Korea Electric Power Corp. ................................................... South Korea 212,500 5,266,112
National Grid Group Plc. ..................................................... United Kingdom 1,507,900 11,991,951
</TABLE>
137
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
a COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS (CONT.)
National Power Plc. .......................................................... United Kingdom 2,000 $ 17,669
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 386,900 3,917,363
------------
78,483,425
------------
TOTAL COMMON STOCKS (COST $619,818,334) 669,917,488
============
PREFERRED STOCKS AND RIGHTS 2.3%
Banco Bradesco SA, pfd. ...................................................... Brazil 451,500,022 2,503,662
a Banco Bradesco SA BBD, rts., pfd. ............................................ Brazil 18,714,288 10,656
Centrais Eletricas Brasileiras SA (Electrobras), ADR, pfd. ................... Brazil 176,400 1,693,557
a Centrais Geradoras Do Sul Do Brasil SA, ADR, pfd. ............................ Brazil 17,640 109,489
Coteminas Cia Tecidos Norte de Minas, pfd. ................................... Brazil 1,952,000 210,023
a Embratel Participacoes SA, ADR, pfd. ......................................... Brazil 98,400 1,371,450
Empresa Nacional de Comercio Redito Participacoes, pfd. ...................... Brazil 1,952,000 2,908
News Corp. Ltd., pfd. ........................................................ Australia 903,781 5,504,539
a Tele Celular Sul Participacoes SA, ADR, pfd. ................................. Brazil 9,840 171,585
a Tele Centro Oeste Celular Participacoes SA, ADR, pfd. ........................ Brazil 32,800 96,350
a Tele Centro Sul Participacoes SA, ADR, pfd. .................................. Brazil 19,680 822,870
a Tele Leste Celular Participacoes SA, ADR, pfd. ............................... Brazil 1,968 55,842
a Tele Nordeste Celular Participacoes SA, ADR, pfd. ............................ Brazil 4,920 91,020
a Tele Norte Celular Participacoes SA, ADR, pfd. ............................... Brazil 1,968 44,403
a Tele Norte Leste Participacoes SA, ADR, pfd. ................................. Brazil 98,400 1,223,850
a Tele Sudeste Celular Participacoes SA, ADR, pfd. ............................. Brazil 19,680 407,130
Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd. ........................ Brazil 98,400 10,763
a Telemig Celular Participacoes SA, ADR, pfd. .................................. Brazil 4,920 104,550
a Telesp Celular Participacoes SA, ADR, pfd. ................................... Brazil 39,360 688,800
a Telesp Participacoes SA, ADR, pfd. ........................................... Brazil 98,400 2,177,100
------------
TOTAL PREFERRED STOCKS AND RIGHTS (COST $22,367,259).......................... 17,300,547
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
BONDS 1.8%
Alfa SA de CV:
cvt., 8.00%, 9/15/00 ...................................................... Mexico $ 1,650,000 1,551,000
cvt., 144A, 8.00%, 9/15/00 ................................................ Mexico 2,710,000 2,547,400
Government of Italy, cvt., 5.00%, 6/28/01 .................................... Italy 4,950,000 9,262,688
------------
TOTAL BONDS (COST $12,833,850) ............................................... 13,361,088
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $655,019,443) 700,579,123
============
g REPURCHASE AGREEMENTS 5.7%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $25,013,194)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 25,000,000 25,000,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $17,678,129)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 17,669,000 17,669,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $42,669,000)................................ 42,669,000
------------
TOTAL INVESTMENTS (COST $697,688,443) 99.5%................................... 743,248,123
OTHER ASSETS, LESS LIABILITIES .5%............................................ 3,832,231
------------
TOTAL NET ASSETS 100.0%....................................................... $747,080,354
============
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
138
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL INCOME SECURITIES FUND AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 95.6%
ARGENTINA 1.1%
Republic of Argentina, 10.95%, 11/01/99 ...................................... $ 1,645,000 $ 1,677,900
------------
AUSTRALIA 4.0%
Government of Australia, 6.75%, 11/15/06 ..................................... 8,810,000 AUD 6,035,730
------------
BELGIUM 4.8%
Kingdom of Belgium, 6.25%, 3/28/07 ........................................... 213,440,000 BEF 7,203,979
------------
BRAZIL .6%
Government of Brazil, FRN, 6.1875%, 4/15/09 .................................. 1,510,000 835,219
------------
CANADA 8.8%
Government of Canada:
7.25%, 6/01/03 ............................................................ 2,025,000 CAD 1,445,225
7.50%, 12/01/03 ........................................................... 2,025,000 CAD 1,472,278
10.25%, 2/01/04 ........................................................... 2,025,000 CAD 1,636,387
9.00%, 12/01/04 ........................................................... 2,025,000 CAD 1,597,351
8.75%, 12/01/05 ........................................................... 2,025,000 CAD 1,615,794
7.00%, 12/01/06 ........................................................... 1,315,000 CAD 974,033
10.25%, 3/15/14 ........................................................... 2,025,000 CAD 2,038,118
8.00%, 6/01/23 ............................................................ 2,025,000 CAD 1,820,984
9.00%, 6/01/25 ............................................................ 725,000 CAD 723,376
------------
13,323,546
------------
DENMARK 2.7%
Kingdom of Denmark:
9.00%, 11/15/00 ........................................................... 6,600,000 DKK 1,131,577
8.00%, 5/15/03 ............................................................ 15,995,000 DKK 2,918,531
------------
4,050,108
------------
GERMANY 11.8%
Federal Republic of Germany, 5.25%, 2/21/01 .................................. 17,855,000 DEM 11,182,959
Hypothekenbank In Essen AG, 5.25%, 1/22/08 ................................... 10,325,000 DEM 6,637,854
------------
17,820,813
------------
ITALY 5.1%
Buoni Poliennali del Tesoro:
10.50%, 7/15/00 ........................................................... 4,400,000,000 ITL 2,929,879
7.75%, 11/01/06 ........................................................... 6,400,000,000 ITL 4,839,952
------------
7,769,831
------------
MEXICO 5.6%
United Mexican States:
9.75%, 2/06/01 ............................................................ 6,560,000 6,732,200
9.875%, 1/15/07 ........................................................... 1,700,000 1,685,125
------------
8,417,325
------------
NEW ZEALAND 4.1%
Government of New Zealand:
6.50%, 2/15/00 ............................................................ 6,035,000 NZD 3,237,347
7.00%, 7/15/09 ............................................................ 5,050,000 NZD 2,993,546
------------
6,230,893
------------
PERU .5%
Republic of Peru, FRN, 4.00%, 3/07/17 ........................................ 1,300,000 822,250
------------
SWEDEN 2.7%
Kingdom of Sweden, 10.25%, 5/05/03 ........................................... 26,000,000 SEK 4,041,267
------------
TURKEY .3%
Republic of Turkey, 9.875%, 2/23/05 .......................................... 535,000 471,106
------------
UNITED KINGDOM 8.5%
United Kingdom:
6.50%, 12/07/03 ........................................................... 5,400,000 GBP 9,839,940
7.50%, 12/07/06 ........................................................... 1,500,000 GBP 2,989,768
------------
12,829,708
------------
</TABLE>
139
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL INCOME SECURITIES FUND AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
UNITED STATES 34.1%
U.S. Treasury Bond, 5.25%, 11/15/28 .......................................... $ 24,500,000 $ 25,120,169
U.S. Treasury Notes:
4.625%, 11/30/00 .......................................................... 14,810,000 14,823,892
7.25%, 8/15/04 ............................................................ 6,519,000 7,333,873
6.125%, 11/15/27 .......................................................... 3,702,000 4,147,399
------------
51,425,333
------------
VENEZUELA .9%
Republic of Venezuela, 144A, 9.125%, 6/18/07 ................................. 1,940,000 1,362,850
------------
TOTAL LONG TERM INVESTMENTS (COST $141,515,105) 144,317,858
------------
g REPURCHASE AGREEMENT (COST $3,960,000) 2.6%
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $3,962,046)
Collateralized by U.S. Treasury Notes & Bonds ............................... 3,960,000 3,960,000
------------
TOTAL INVESTMENTS (COST $145,475,105) 98.2% 148,277,858
NET EQUITY IN FORWARD CONTRACTS (8,133)
OTHER ASSETS, LESS LIABILITIES 1.8% 2,671,012
------------
TOTAL NET ASSETS 100.0% $150,940,737
============
</TABLE>
See Currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
140
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
a COMMON STOCKS, WARRANTS AND RIGHTS 87.2%
AEROSPACE & MILITARY TECHNOLOGY .1%
Hong Kong Aircraft Engineering Co. Ltd. ...................................... Hong Kong 513,400 $ 702,448
------------
APPLIANCES & HOUSEHOLD DURABLES 2.6%
Electrolux AB, B ............................................................. Sweden 1,160,000 19,963,483
Fisher & Paykel Ltd. ......................................................... New Zealand 1,321,125 4,780,515
------------
24,743,998
------------
AUTOMOBILES 2.6%
Autoliv Inc., SDR ............................................................ Sweden 317,000 11,380,370
Fiat SpA ..................................................................... Italy 3,391,410 11,776,772
Volvo AB, B .................................................................. Sweden 91,500 2,099,608
------------
25,256,750
------------
BANKING 10.8%
Banco Popular Espanol SA ..................................................... Spain 62,400 4,712,075
BPI Socieda de Gestora de Participacoes Socias SA ............................ Portugal 321,978 10,926,722
Credit Commercial de France CCF .............................................. France 128,800 11,966,489
Deutsche Bank AG ............................................................. Germany 407,000 24,015,346
Foreningssparbanken AB, A .................................................... Sweden 163,000 4,222,902
a Kookmin Bank ................................................................. South Korea 96,678 788,703
Merita Ltd., A ............................................................... Finland 1,254,500 7,977,821
National Bank of Canada ...................................................... Canada 447,000 7,217,188
National Westminster Bank Plc. ............................................... United Kingdom 641,668 12,362,558
Svenska Handelsbanken, A ..................................................... Sweden 155,400 6,556,638
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 548,700 7,921,856
Unibanco Uniao de Bancos Brasileiros SA, unit ................................ Brazil 28,412,000 987,630
Union Bank of Norway, Primary Capital Cert. .................................. Norway 199,000 3,865,599
------------
103,521,527
------------
BROADCASTING & PUBLISHING 2.1%
Cordiant Communications Group Plc. ........................................... United Kingdom 3,561,500 6,340,246
NV Holdingsmij de Telegraaf .................................................. Netherlands 504,000 13,562,104
------------
19,902,350
------------
BUILDING MATERIALS & COMPONENTS 3.5%
Anglian Group Plc. ........................................................... United Kingdom 2,536,000 9,198,037
Cie de Saint Gobain .......................................................... France 13,292 1,877,374
Hepworth Plc. ................................................................ United Kingdom 1,330,100 3,551,802
Pioneer International Ltd. ................................................... Australia 7,462,117 15,790,273
a Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 405,100 908,646
Unione Cementi Marchino Emiliane (Unicem), di Risp ........................... Italy 468,000 2,402,522
------------
33,728,654
------------
BUSINESS & PUBLIC SERVICES .9%
Esselte AB, B ................................................................ Sweden 158,500 2,600,669
Lex Service Plc. ............................................................. United Kingdom 902,000 5,732,701
------------
8,333,370
------------
CHEMICALS 1.6%
Akzo Nobel NV ................................................................ Netherlands 129,200 5,886,183
DSM NV ....................................................................... Netherlands 19,000 1,807,162
Imperial Chemical Industries Plc. ............................................ United Kingdom 857,000 7,400,100
------------
15,093,445
------------
CONSTRUCTION & HOUSING 2.7%
Dragados y Construcciones SA ................................................. Spain 378,000 13,952,026
a Fairview Holdings Plc. ....................................................... United Kingdom 623,475 912,833
Sirti SpA .................................................................... Italy 1,833,800 11,073,250
------------
25,938,109
------------
</TABLE>
141
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
ELECTRICAL & ELECTRONICS 3.3%
General Electric Co. Plc. .................................................... United Kingdom 1,920,000 $ 17,249,813
Philips Electronics NV ....................................................... Netherlands 219,307 14,724,081
------------
31,973,894
------------
ENERGY SOURCES 4.0%
Societe Elf Aquitaine SA ..................................................... France 148,024 17,117,809
Total SA, B .................................................................. France 62,039 6,285,861
YPF Sociedad Anonima ......................................................... Argentina 25,100 702,177
YPF Sociedad Anonima, ADR .................................................... Argentina 495,000 13,829,063
------------
37,934,910
------------
FINANCIAL SERVICES 3.6%
ING Groep NV ................................................................. Netherlands 563,685 34,391,183
------------
FOOD & HOUSEHOLD PRODUCTS 1.3%
Hillsdown Holdings Plc. ...................................................... United Kingdom 1,246,950 1,576,711
McBride Plc. ................................................................. United Kingdom 1,000,000 1,663,755
Tate & Lyle Plc. ............................................................. United Kingdom 1,540,500 8,586,099
a Terranova Foods Plc. ......................................................... United Kingdom 623,475 1,151,414
------------
12,977,979
------------
FOREST PRODUCTS & PAPER 3.1%
Carter Holt Harvey Ltd. ...................................................... New Zealand 3,243,400 2,912,659
Cartiere Burgo SpA ........................................................... Italy 696,200 4,504,138
Enso OY, R ................................................................... Finland 186,900 1,882,510
Fletcher Challenge Ltd. Forestry Division .................................... New Zealand 6,020,000 2,003,444
Mayr-Melnhof Karton AG ....................................................... Austria 39,400 1,842,504
a PT Indah Kiat Pulp & Paper Corp. TBK ......................................... Indonesia 9,724,297 2,660,421
a PT Indah Kiat Pulp & Paper Corp. TBK, wts., 4/13/01 .......................... Indonesia 782,553 143,222
a PT Indah Kiat Pulp & Paper Corp. TBK, wts., 7/11/02 .......................... Indonesia 818,888 111,245
Sappi Ltd. ................................................................... South Africa 722,582 2,794,397
Stora Kopparbergs Bergslags AB, B ............................................ Sweden 804,250 8,929,717
Unipapel SA .................................................................. Spain 104,400 1,514,105
------------
29,298,362
------------
HEALTH & PERSONAL CARE 4.4%
Internatio-Muller NV ......................................................... Netherlands 240,308 5,954,240
Novartis AG .................................................................. Switzerland 2,506 4,926,247
Nycomed Amersham Plc. ........................................................ United Kingdom 4,245,505 29,313,446
Nycomed Amersham Plc., fgn. .................................................. United Kingdom 248,300 1,727,248
------------
41,921,181
------------
INDUSTRIAL COMPONENTS 1.3%
BTR Plc. ..................................................................... United Kingdom 3,416,237 6,991,052
Granges AB ................................................................... Sweden 191,000 2,756,915
Meggitt Plc. ................................................................. United Kingdom 1,487,610 3,069,023
------------
12,816,990
------------
INSURANCE 5.5%
Ace Ltd. ..................................................................... Bermuda 682,500 23,503,594
Baloise-Holding .............................................................. Switzerland 7,380 7,656,716
GIO Australia Holdings Ltd. .................................................. Australia 1,549,534 5,094,181
Muenchner Rueckversicherungs-Gesellschaft .................................... Germany 33,000 16,147,334
------------
52,401,825
------------
LEISURE & TOURISM 1.5%
Kuoni Reisen Holding AG, B ................................................... Switzerland 3,570 14,165,635
------------
</TABLE>
142
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
MACHINERY & ENGINEERING 1.2%
Bucher Holding AG, br. ....................................................... Switzerland 12,800 $ 10,251,183
IHC Caland NV ................................................................ Netherlands 26,130 1,086,023
------------
11,337,206
------------
MERCHANDISING 4.0%
David Jones Ltd. ............................................................. Australia 2,463,527 2,719,809
Hudson's Bay Co. ............................................................. Canada 357,000 4,497,363
Safeway Plc. ................................................................. United Kingdom 1,695,778 8,457,024
a Sobeys Canada Inc. ........................................................... Canada 104,695 1,158,734
Somerfield Plc. .............................................................. United Kingdom 1,552,716 10,346,273
Storehouse Plc. .............................................................. United Kingdom 3,314,000 7,553,748
a Vendex NV .................................................................... Netherlands 132,886 3,228,860
------------
37,961,811
------------
METALS & MINING 2.7%
Anglo American Platinum Corp. Ltd. ........................................... South Africa 417,465 5,726,816
Boehler Uddeholm AG .......................................................... Austria 33,000 1,536,737
Boehler Uddeholm AG, 144A .................................................... Austria 27,055 1,259,892
British Steel Plc. ........................................................... United Kingdom 4,033,200 6,156,661
Companhia Siderurgica Nacional CSN, ADR ...................................... Brazil 276,365 6,218,213
Grupo Mexico SA de CV, B ..................................................... Mexico 1,983,600 5,214,722
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 10,450 665,617
------------
26,778,658
------------
MISCELLANEOUS MATERIALS & COMMODITIES .5%
Korea Chemical Co. Ltd. ...................................................... South Korea 57,900 2,089,696
Unitor ASA ................................................................... Norway 295,000 2,865,205
------------
4,954,901
------------
MULTI-INDUSTRY 1.6%
Cheung Kong Holdings Ltd. .................................................... Hong Kong 188,600 1,357,185
Elementis Plc. ............................................................... United Kingdom 3,336,000 4,634,490
Jardine Strategic Holdings Ltd. .............................................. Hong Kong 2,574,940 3,733,663
Swire Pacific Ltd., B ........................................................ Hong Kong 7,937,100 5,276,203
------------
15,001,541
------------
REAL ESTATE .1%
Hang Lung Development Co. Ltd. ............................................... Hong Kong 779,000 834,580
------------
RECREATION & OTHER CONSUMER GOODS 1.1%
Swatch Group AG, br. ......................................................... Switzerland 15,400 9,530,397
Yue Yuen Industrial (Holdings) Ltd. .......................................... Hong Kong 394,800 759,304
------------
10,289,701
------------
TELECOMMUNICATIONS 11.5%
British Telecommunications Plc. .............................................. United Kingdom 1,446,000 21,808,485
Hong Kong Telecommunications Ltd. ............................................ Hong Kong 1,238,479 2,166,109
Nokia AB, A .................................................................. Finland 310,000 37,958,684
a Telecomunicacoes Brasileiras SA (Telebras), ADR .............................. Brazil 177,300 12,887,494
Telefonica del Peru SA, B .................................................... Peru 2,445,602 3,076,375
Telefonica del Peru SA, B, ADR ............................................... Peru 251,900 3,195,981
Telefonica SA ................................................................ Spain 646,100 28,772,188
a Telefonica SA, rts. .......................................................... Spain 646,100 574,532
------------
110,439,848
------------
TEXTILES & APPAREL .2%
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 19,340,200 1,772,441
------------
TRANSPORTATION .7%
Air New Zealand Ltd., B ...................................................... New Zealand 2,322,000 3,655,263
Helikopter Services Group ASA ................................................ Norway 134,000 633,154
</TABLE>
143
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
TRANSPORTATION (CONT.)
Mayne Nickless Ltd., A ....................................................... Australia 478,210 $ 1,774,527
Tranz Rail Holdings Ltd., ADR ................................................ New Zealand 47,765 322,414
------------
6,385,358
------------
UTILITIES ELECTRICAL & GAS 8.7%
BG Plc. ...................................................................... United Kingdom 2,566,588 16,215,985
a Centrais Eletricas Brasileiras SA (Electrobras) .............................. Brazil 363,450,000 6,256,785
Centrais Geradoras Do Sul Do Brasil SA (Gerasul) ............................. Brazil 363,450,000 475,275
a Centrica Plc. ................................................................ United Kingdom 1,290,000 2,591,590
Compania Sevillana de Electricidad SA ........................................ Spain 246,970 3,390,062
Iberdrola SA, Br. ............................................................ Spain 1,517,800 28,439,559
Korea Electric Power Corp. ................................................... South Korea 66,000 1,635,593
Shandong Huaneng Power Development Co. Ltd., ADR ............................. China 338,300 1,543,494
Thames Water Group Plc. ...................................................... United Kingdom 896,939 17,355,296
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 516,300 5,227,532
------------
83,131,171
------------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS (COST $662,736,790) 833,989,826
------------
PREFERRED STOCKS AND RIGHTS 1.7%
Banco Bradesco SA, pfd. ...................................................... Brazil 525,200,000 2,912,344
a Banco Bradesco SA BBD, rts., pfd. ............................................ Brazil 21,769,089 12,396
Banco Itau SA, pfd. .......................................................... Brazil 4,209,000 2,055,260
News Corp. Ltd., pfd. ........................................................ Australia 3,486 21,232
Petrobras-Petroleo Brasileiro SA, pfd. ....................................... Brazil 60,000,000 6,803,228
Usinas Siderurgicas de Minas, ADR, 144A, pfd. ................................ Brazil 1,851,400 4,091,238
------------
TOTAL PREFERRED STOCKS AND RIGHTS (COST $24,653,583) ......................... 15,895,698
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $687,390,373) ........... 849,885,524
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
g REPURCHASE AGREEMENTS 11.4%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $40,021,111)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States $40,000,000 40,000,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $33,469,284)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 33,452,000 33,452,000
Warburg Dillon Read LLC, 4.75%, 1/04/99 (Maturity Value $35,818,894)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 35,800,000 35,800,000
TOTAL REPURCHASE AGREEMENTS (COST $109,252,000) .............................. 109,252,000
TOTAL INVESTMENTS (COST $796,642,373) 100.3% ................................. 959,137,524
OTHER ASSETS, LESS LIABILITIES (.3%) ......................................... (3,237,422)
------------
TOTAL NET ASSETS 100.0% $955,900,102
============
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income Producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
144
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 90.6%
APPLIANCES & HOUSEHOLD DURABLES 1.8%
Email Ltd. ................................................................... Australia 44,964 $ 64,286
Fisher & Paykel Ltd. ......................................................... New Zealand 70,222 254,100
Guangdong Kelon Electrical Holdings Ltd., H .................................. China 92,000 81,939
Guangdong Kelon Electrical Holdings Ltd., H, 144A ............................ China 40,000 35,626
Shenzhen Konka Electronic Group Co. Ltd., B .................................. China 17,000 8,580
------------
444,531
------------
AUTOMOBILES 1.8%
Bilia AB, A .................................................................. Sweden 28,100 192,399
Volvo AB, B .................................................................. Sweden 11,600 266,180
------------
458,579
------------
BANKING 7.1%
Banco de Valencia SA ......................................................... Spain 3,272 98,025
Banco Pastor SA .............................................................. Spain 8,000 502,486
Bank Austria AG, 144A ........................................................ Austria 6,000 305,264
Commercial International Bank Ltd., GDR, 144A ................................ Egypt 17,550 134,258
Fokus Bank AS ................................................................ Norway 44,000 436,015
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 10,235 147,768
Union Bank of Norway, Primary Capital Cert. .................................. Norway 7,170 139,278
------------
1,763,094
------------
BROADCASTING & PUBLISHING 2.5%
GTC Transcontinental Group Ltd., B ........................................... Canada 63,300 618,164
------------
BUILDING MATERIALS & COMPONENTS 6.5%
Caradon Plc. ................................................................. United Kingdom 117,500 199,401
Cementos Diamante SA, ADR, 144A .............................................. Colombia 26,900 47,075
Cristaleria Espanola SA, Br. ................................................. Spain 1,291 87,284
Det Danske Traelastkompagni AS ............................................... Denmark 3,752 253,494
Gujarat Ambuja Cements Ltd. .................................................. India 47,500 290,726
Mirgor SA Comercial Industrial Financiera Inmobi, C, ADR ..................... Argentina 24,300 25,515
Sarna Kunststoff Holding AG .................................................. Switzerland 52 74,772
Schuttersveld NV ............................................................. Netherlands 11,146 264,292
a Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 67,621 151,675
Suez Cement Co., GDR, 144A ................................................... Egypt 16,450 235,235
------------
1,629,469
------------
BUSINESS & PUBLIC SERVICES 3.7%
Kardex AG, Br. ............................................................... Switzerland 1,494 411,707
Lex Service Plc. ............................................................. United Kingdom 54,100 343,835
Scribona AB, B ............................................................... Sweden 19,045 68,842
a Sifo Group AB ................................................................ Sweden 19,045 89,283
------------
913,667
------------
CHEMICALS 1.8%
Energia e Industrias Aragonesas Eia SA ....................................... Spain 34,500 234,958
Yule Catto & Company Plc. .................................................... United Kingdom 53,100 220,863
------------
455,821
------------
CONSTRUCTION & HOUSING 2.7%
Dragados y Construcciones SA, br. ............................................ Spain 14,155 522,463
a Fairview Holdings Plc. ....................................................... United Kingdom 25,000 36,603
Hollandsche Beton Groep NV ................................................... Netherlands 9,600 118,676
------------
677,742
------------
</TABLE>
145
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS 2.7%
Dongfang Electrical Machinery Co. Ltd., H .................................... China 179,000 $ 10,628
Techtronic Industries Co. Ltd. ............................................... Hong Kong 1,791,000 319,027
Varitronix International Ltd. ................................................ Hong Kong 187,500 350,931
------------
680,586
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.8%
Swisslog Holding AG .......................................................... Switzerland 1,000 94,649
VTech Holdings Ltd. .......................................................... Hong Kong 136,000 593,346
------------
687,995
------------
FINANCIAL SERVICES 3.3%
Dah Sing Financial Holdings Ltd. ............................................. Hong Kong 134,800 330,595
Housing Development Finance Corp. Ltd. ....................................... India 2,250 115,343
Industrial Credit & Inv. Corp. of India (ICICI) .............................. India 170,000 188,217
a Morgan Stanley Growth Fund ................................................... India 1,275,000 180,016
------------
814,171
------------
FOOD & HOUSEHOLD PRODUCTS 7.3%
a Charoen Pokphand Feedmill Public Co. Ltd., fgn. .............................. Thailand 71,300 87,322
Hazlewood Foods Plc. ......................................................... United Kingdom 252,600 561,053
Hillsdown Holdings Plc. ...................................................... United Kingdom 50,000 63,223
Illovo Sugar Ltd. ............................................................ South Africa 187,000 198,674
McBride Plc. ................................................................. United Kingdom 64,100 106,647
National Foods Ltd. .......................................................... Australia 182,091 323,888
Perkins Foods Plc. ........................................................... United Kingdom 189,240 437,640
a Terranova Foods Plc. ......................................................... United Kingdom 25,000 46,169
------------
1,824,616
------------
FOREST PRODUCTS & PAPER 2.5%
Crown-Van Gelder Papierfabrieken NV .......................................... Netherlands 6,115 96,122
a Empaques Ponderosa SA de CV, B ............................................... Mexico 151,800 79,200
Munksjo AB ................................................................... Sweden 12,995 89,778
Primex Forest Products Ltd. .................................................. Canada 90,000 357,422
------------
622,522
------------
HEALTH & PERSONAL CARE 2.3%
Internatio-Muller NV ......................................................... Netherlands 5,844 144,800
Ono Pharmaceutical Co. Ltd. .................................................. Japan 12,000 368,085
a Skyepharma Plc. .............................................................. United Kingdom 55,600 72,616
------------
585,501
------------
INDUSTRIAL COMPONENTS 5.6%
Granges AB ................................................................... Sweden 14,679 211,878
Otra NV ...................................................................... Netherlands 23,500 306,789
Sylea SA ..................................................................... France 4,447 245,985
Weir Group Plc. .............................................................. United Kingdom 120,900 402,296
Yamato Kogyo Co. Ltd. ........................................................ Japan 41,000 237,713
------------
1,404,661
------------
INSURANCE 1.0%
HIH Insurance Ltd. ........................................................... Australia 193,879 256,858
------------
MACHINERY & ENGINEERING 1.9%
Arcadis NV ................................................................... Netherlands 37,875 296,671
Laird Group Plc. ............................................................. United Kingdom 62,000 169,686
------------
466,357
------------
MERCHANDISING 16.3%
David Jones Ltd. ............................................................. Australia 243,000 268,279
Giordano International Ltd. .................................................. Hong Kong 933,000 174,623
Li & Fung Ltd. ............................................................... Hong Kong 241,000 499,280
</TABLE>
146
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING (CONT.)
Makro Atacadista SA, ADR, 144A ............................................... Brazil 37,500 $ 260,708
Moebel Walther AG ............................................................ Germany 7,506 290,668
Northwest Company Fund ....................................................... Canada 31,365 306,299
Sa des Galeries Lafayette .................................................... France 810 870,001
Safeway Plc. ................................................................. United Kingdom 58,559 292,040
Samas-Groep NV ............................................................... Netherlands 11,125 199,179
a Sobeys Canada Inc. ........................................................... Canada 15,477 171,295
Somerfield Plc. .............................................................. United Kingdom 82,800 551,724
Storehouse ................................................................... United Kingdom 88,185 201,004
------------
4,085,100
------------
METALS & MINING 4.2%
Arbed SA ..................................................................... Luxembourg 3,240 217,863
Boehler-Uddeholm AG .......................................................... Austria 4,993 232,513
Elkem ASA, A ................................................................. Norway 23,850 284,860
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 2,625 167,200
PT Timah ..................................................................... Indonesia 204,000 137,925
------------
1,040,361
------------
MULTI-INDUSTRY 3.2%
a Amer Group Ltd., A ........................................................... Finland 11,300 119,396
La Cemento Nacional CA, GDR, 144A ............................................ Ecuador 575 62,100
Nagron Nationaal Grondbezit NV ............................................... Netherlands 7,400 216,081
Saha Union Public Co. Ltd., fgn. ............................................. Thailand 201,000 84,361
Wagon Plc. ................................................................... United Kingdom 34,300 128,400
Zehnder Holding AG, br. ...................................................... Switzerland 465 189,589
------------
799,927
------------
REAL ESTATE 1.6%
Inversiones y Representacion SA .............................................. Argentina 144,868 397,296
------------
TELECOMMUNICATIONS .2%
a Digital Telecommunications Philippines Inc. .................................. Philippines 2,198,000 53,679
------------
TEXTILES & APPAREL .9%
Gamma Holding NV ............................................................. Netherlands 3,000 139,074
Inner Mongolia Erdos Cashmere Products Co. Ltd., B ........................... China 497,000 64,610
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 326,000 29,876
------------
233,560
------------
TRANSPORTATION 2.4%
a Anangel-American Shipholdings Ltd., ADR ...................................... Greece 35,000 179,375
Helikopter Services Group ASA ................................................ Norway 16,400 77,490
Orient Overseas International Ltd. ........................................... Hong Kong 362,000 93,453
a Osprey Maritime Ltd. ......................................................... Singapore 350,000 108,182
Stolt Nielsen SA, ADR ........................................................ Norway 15,000 153,750
------------
612,250
------------
UTILITIES ELECTRICAL & GAS 2.9%
Gas y Electricidad SA, Br. ................................................... Spain 5,700 571,225
Guangdong Electric Power Development Co Ltd., B .............................. China 338,520 92,198
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 7,000 70,875
------------
734,298
------------
WHOLESALE & INTERNATIONAL TRADE 1.6%
Dahl International AB ........................................................ Sweden 9,550 94,254
Dahl International AB, 144A .................................................. Sweden 6,300 62,178
Eurodis Electron Plc. ........................................................ United Kingdom 150,000 233,342
------------
389,774
------------
TOTAL COMMON STOCKS (COST $25,678,008) 22,650,579
------------
</TABLE>
147
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 3.4%
Ballast Nedam NV, ctf., cvt., pfd. ........................................... Netherlands 6,700 $ 217,776
Cia Brasileira de Petroleo Ipiranga, pfd. .................................... Brazil 25,141,000 139,412
Fertilizantes Fosfatados SA, pfd. ............................................ Brazil 41,995,000 107,746
Moebel Walther AG, pfd. ...................................................... Germany 4,550 154,339
Weg SA, pfd. ................................................................. Brazil 507,200 243,473
------------
TOTAL PREFERRED STOCKS (COST $1,359,938)...................................... 862,746
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $27,037,946)............. 23,513,325
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
g REPURCHASE AGREEMENTS 5.9%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $750,396)
Collateralized by U.S. Treasury Notes & Bonds ................................ United States $750,000 750,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $718,371)
Collateralized by U.S. Treasury Notes & Bonds ................................ United States 718,000 718,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $1,468,000)................................. 1,468,000
------------
TOTAL INVESTMENTS (COST $28,505,946) 99.9%.................................... 24,981,325
OTHER ASSETS, LESS LIABILITIES .1%............................................ 18,119
------------
TOTAL NET ASSETS 100.0%....................................................... $ 24,999,444
------------
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
148
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
TEMPLETON PACIFIC GROWTH FUND COUNTRY WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 101.1%
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp. ................................. Japan 15,100 $ 1,101,711
-----------
BANKING 11.2%
Development Bank of Singapore Ltd., fgn. ... Singapore 495,000 4,470,000
HSBC Holdings Plc. ......................... Hong Kong 39,000 971,571
Overseas Union Bank Ltd., fgn. ............. Singapore 472,560 2,062,080
(a) Philippine National Bank ................... Philippines 962,500 1,484,576
PT Bank Bali, fgn. ......................... Indonesia 4,168,220 196,614
PT Bank Pan Indonesia TBK .................. Indonesia 6,182,625 311,075
Singapore Finance Ltd., fgn. ............... Singapore 213,000 194,927
(a) Thai Farmers Bank Public Co. Ltd. .......... Thailand 36,570 53,845
(a) Thai Farmers Bank Public Co. Ltd., fgn. .... Thailand 733,440 1,291,872
-----------
11,036,560
-----------
BROADCASTING & PUBLISHING 3.2%
(a) Inchcape Marketing Services Ltd. ........... Singapore 1,240,000 676,364
South China Morning Post Ltd. .............. Hong Kong 4,888,000 2,507,961
-----------
3,184,325
-----------
BUILDING MATERIALS & COMPONENTS 2.1%
Okumura Corp. .............................. Japan 467,000 2,074,176
-----------
CHEMICALS
Fauji Fertilizer Co. Ltd. .................. Pakistan 10,000 9,206
-----------
CONSTRUCTION & HOUSING 8.7%
Daito Trust Construction Co. Ltd. .......... Japan 409,000 3,549,743
Road King Infrastructure Ltd. .............. Hong Kong 3,831,977 2,819,358
Toda Corp. ................................. Japan 470,000 2,279,167
-----------
8,648,268
-----------
ELECTRICAL & ELECTRONICS
Hitachi Ltd. ............................... Japan 800 4,965
-----------
FINANCIAL SERVICES 2.5%
Commerce Asset-Holding Bhd. ................ Malaysia 1,572,000 970,890
(a) Commerce Asset-Holding Bhd., wts. .......... Malaysia 163,750 16,512
Industrial Finance Corp. of Thailand, fgn. . Thailand 2,783,133 1,148,947
Public Finance Bhd., fgn. .................. Malaysia 928,000 327,512
-----------
2,463,861
-----------
FOREST PRODUCTS & PAPER 2.6%
Carter Holt Harvey Ltd. .................... New Zealand 2,411,800 2,165,860
(a) PT Inti Indorayon Utama .................... Indonesia 129,000 8,113
(a) PT Tjiwi Kimia TBK ......................... Indonesia 1,388,741 362,470
(a) PT Tjiwi Kimia TBK, wts. ................... Indonesia 192,880 22,563
-----------
2,559,006
-----------
INDUSTRIAL COMPONENTS 6.2%
Fuji Heavy Industries Ltd. ................. Japan 577,000 2,890,115
Mitsubishi Heavy Industries Ltd. ........... Japan 824,000 3,214,184
-----------
6,104,299
-----------
INSURANCE 2.9%
National Mutual Asia Ltd. .................. Hong Kong 3,860,000 2,889,800
-----------
LEISURE & TOURISM 1.2%
Toei Co. Ltd. .............................. Japan 397,000 1,175,514
-----------
MERCHANDISING .7%
Takashimaya Co. Ltd. ....................... Japan 81,418 686,423
-----------
METALS & MINING 1.5%
Capral Aluminum Ltd. ....................... Australia 1,083,098 1,514,649
-----------
</TABLE>
149
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON PACIFIC GROWTH FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MISCELLANEOUS MATERIALS & COMMODITIES 2.3%
Golden Hope Plantations Bhd. ............................. Malaysia 2,607,000 $ 2,245,407
-------------
MULTI-INDUSTRY 15.8%
Broken Hill Proprietary Co. Ltd. ......................... Australia 211,000 1,555,462
Cheung Kong Holdings Ltd. ................................ Hong Kong 460,800 3,315,964
Hicom Holdings Bhd. ...................................... Malaysia 1,634,000 542,350
Hutchison Whampoa Ltd. ................................... Hong Kong 216,000 1,526,477
Jardine Matheson Holdings Ltd. ........................... Hong Kong 632,031 1,630,640
SIME Darby Bhd. .......................................... Malaysia 1,798,800 1,647,554
Swire Pacific Ltd., A .................................... Hong Kong 645,000 2,888,961
Wheelock and Company Ltd. ................................ Hong Kong 3,100,000 2,480,880
-------------
15,588,288
-------------
REAL ESTATE 6.5%
City Developments Ltd. ................................... Singapore 888,600 3,850,600
(a) Filinvest Land Inc. ...................................... Philippines 5,675,000 320,951
Hon Kwok Land Investment Co. Ltd. ........................ Hong Kong 5,940,438 559,750
New World Development Co. Ltd. ........................... Hong Kong 658,978 1,658,662
-------------
6,389,963
-------------
TELECOMMUNICATIONS 4.7%
Hong Kong Telecommunications Ltd. ........................ Hong Kong 1,353,033 2,366,465
Pakistan Telecommunications Corp., A, PTC ................ Pakistan 5,906,900 2,255,902
-------------
4,622,367
-------------
TEXTILES & APPAREL 6.9%
Nisshinbo Industries Inc. ................................ Japan 700,000 2,445,035
(a) PT Indorama Synthetics ................................... Indonesia 3,657,384 655,569
(a) PT Panasia Indosyntec .................................... Indonesia 3,423,000 75,349
Wacoal Corp. ............................................. Japan 280,000 3,606,738
-------------
6,782,691
-------------
TRANSPORTATION 15.6%
Cathay Pacific Airways Ltd. .............................. Hong Kong 3,000,000 2,981,703
East Japan Railway Co. ................................... Japan 600 3,356,383
Great Eastern Shipping Co. Ltd., GDR ..................... India 156,100 448,788
Guangshen Railway Co. Ltd., H, ADR ....................... China 142,800 856,800
GZI Transport Ltd., 144A ................................. China 1,008,000 197,768
(a) GZI Transport Ltd., 144A, wts. ........................... China 201,600 260
Hitachi Zosen Corp. ...................................... Japan 843,000 1,165,851
Hong Kong Ferry Holdings Co. Ltd. ........................ Hong Kong 745,000 865,468
Malaysian International Shipping Corp., fgn. ............. Malaysia 1,467,267 1,541,166
Singapore Airlines Ltd., fgn. ............................ Singapore 544,600 3,993,733
-------------
15,407,920
-------------
UTILITIES ELECTRICAL & GAS 3.9%
CLP Holdings Ltd. ........................................ Hong Kong 579,500 2,887,308
Shandong Huaneng Power Development Co. Ltd., ADR ......... China 225,000 1,026,563
-------------
3,913,871
-------------
WHOLESALE & INTERNATIONAL TRADE 1.5%
Inchcape Motors Ltd. ..................................... Singapore 1,240,000 1,435,394
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $173,534,980) ..... 99,838,664
-------------
PREFERRED STOCKS .2%
Osprey Maritime Ltd., cvt., 2.50%, pfd. (COST $234,713) .. Singapore 763,000 231,212
-------------
TOTAL INVESTMENTS (COST $173,769,693) 101.3% ............. 100,069,876
OTHER ASSETS, LESS LIABILITIES (1.3%) .................... (1,300,491)
-------------
TOTAL NET ASSETS 100.0% .................................. $ 98,769,385
=============
</TABLE>
(a) Non-income producing.
See notes to financial statements.
150
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES 75.8%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - FIXED RATE 50.5%
GNMA II, 5.50%, 9/20/28 ....................................................... $ 1,201,771 $ 1,157,951
(h) GNMA II, 5.50%, 1/01/29 ....................................................... 1,915,000 1,925,000
GNMA I, SF, 6.00%, 11/15/23 - 11/15/28 ........................................ 19,258,380 19,123,120
GNMA II, 6.00%, 1/20/24 - 10/20/28 ............................................ 62,362,635 50,721,915
(h) GNMA II, 6.00%, 1/01/29 ....................................................... 11,000,000 10,841,875
GNMA I, SF, 6.50%, 5/15/23 - 9/15/28 .......................................... 64,179,406 64,915,181
GNMA II, 6.50%, 1/20/26 - 3/20/28 ............................................. 32,266,772 32,458,632
GNMA I, SF, 7.00%, 3/15/22 - 5/15/28 .......................................... 71,405,323 73,173,795
GNMA I, SF, 7.25%, 11/15/25 ................................................... 1,484,601 1,522,587
GNMA, PL, 7.25%, 5/15/22 - 8/15/22 ............................................ 2,178,218 2,210,170
GNMA I, SF, 7.50%, 2/15/17 - 5/15/28 .......................................... 32,548,120 33,605,421
GNMA II, 7.50%, 11/20/16 - 11/20/26 ........................................... 23,164,494 23,785,377
GNMA I, SF, 8.00%, 4/15/05 - 6/15/25 .......................................... 18,933,004 19,755,967
GNMA II, 8.00%, 2/20/16 - 8/20/26 ............................................. 1,895,192 1,969,618
GNMA I, SF, 8.25%, 4/15/25 .................................................... 859,622 908,722
GNMA I, SF, 8.50%, 8/15/21 - 12/15/24 ......................................... 5,807,603 6,192,045
GNMA I, SF, 9.00%, 4/15/16 - 2/15/21 .......................................... 2,434,812 2,619,102
GNMA I, SF, 9.50%, 7/15/16 - 12/15/21 ......................................... 5,629,226 6,089,662
GNMA II, 9.50%, 4/20/25 ....................................................... 647,240 695,217
GNMA I, SF, 10.00%, 8/15/17 - 8/15/21 ......................................... 4,846,010 5,347,212
------------
359,018,569
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - ADJUSTABLE RATE 1.1%
GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 7/20/17 ......... 2,498,460 2,538,151
GNMA, Cap 11.50%, Margin 2.50% + CMT, Resets Annually, 8.00%, 7/20/25 ......... 1,405,575 1,457,759
GNMA, Cap 14.00%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/16 ........ 3,843,760 3,898,545
------------
7,894,455
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - FIXED RATE 8.4%
FNMA, 6.00%, 10/01/23 - 10/01/28 .............................................. 25,658,910 25,360,412
FNMA, 6.50%, 1/01/24 - 6/01/24 ................................................ 13,197,629 13,307,044
FNMA, 7.00%, 5/01/24 .......................................................... 1,465,149 1,497,593
FNMA, PL, 7.00%, 3/17/35 ...................................................... 4,860,811 4,864,628
FNMA, 7.50%, 4/01/23 - 8/01/25 ................................................ 6,289,578 6,469,010
FNMA, 8.00%, 7/01/16 - 2/01/25 ................................................ 7,223,614 7,505,472
FNMA, 8.50%, 10/01/19 - 2/01/22 ............................................... 531,906 561,772
------------
59,565,931
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - ADJUSTABLE RATE 5.1%
FNMA, Cap 12.49%, Margin 2.00% + CMT, Resets Annually, 7.406%, 2/01/19 ........ 3,290,861 3,365,586
FNMA, Cap 12.819%, Margin 2.127% + CMT, Resets Annually, 7.438%, 9/01/18 ...... 4,626,971 4,749,436
FNMA, Cap 12.93%, Margin 2.24% + CMT, Resets Annually, 7.088%, 2/01/27 ........ 5,375,113 5,525,915
FNMA, Cap 13.313%, Margin 2.126% + CMT, Resets Annually, 7.425%, 7/01/19 ...... 3,133,438 3,207,575
FNMA, Cap 13.644%, Margin 2.011% + CMT, Resets Annually, 7.351%, 1/01/18 ...... 10,213,522 10,445,699
FNMA, Cap 14.625%, Margin 1.25% + COFI, Resets Monthly, 6.132%, 6/01/02 ....... 4,691,068 4,699,607
FNMA, Cap 14.808%, Margin 1.825% + 3CMT, Resets Tri-Annually, 7.331%, 7/01/20 . 1,535,979 1,563,275
FNMA, Cap 15.156%, Margin 2.284% + 3CMT, Resets Tri-Annually, 8.170%, 3/01/20 . 2,574,926 2,649,746
------------
36,206,839
------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - FIXED RATE 9.5%
FHLMC, 6.00%, 1/01/24 - 8/01/28 ............................................... 9,737,875 9,631,639
FHLMC, 6.50%, 6/01/08 - 1/01/24 ............................................... 17,714,531 17,891,137
FHLMC, 7.00%, 4/01/24 ......................................................... 13,394,280 13,688,958
FHLMC, PL, 7.00%, 9/17/31 ..................................................... 18,370,074 18,392,118
FHLMC, 7.50%, 11/01/22 - 5/01/24 .............................................. 4,129,276 4,248,734
FHLMC, 8.00%, 5/01/16 - 5/01/22 ............................................... 2,457,983 2,555,460
</TABLE>
151
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (CONT.)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - FIXED RATE (CONT.)
FHLMC, 8.50%, 4/01/18 - 3/01/22 ........................................... $ 750,228 $ 789,012
FHLMC, 9.00%, 3/01/03 ..................................................... 401,459 415,678
------------
67,612,736
------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - ADJUSTABLE RATE 1.2%
FHLMC, Cap 10.99%, Margin 2.225% + CMT, Resets Annually, 8.011%, 6/01/22 .. 1,848,216 1,877,171
FHLMC, Cap 12.522%, Margin 2.105% + CMT, Resets Annually, 7.618%, 6/01/22 . 2,831,202 2,881,643
FHLMC, Cap 13.458%, Margin 2.195% + CMT, Resets Annually, 7.818%, 2/01/19 . 4,037,506 4,107,718
------------
8,866,532
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $522,774,699) ...................... 539,165,062
------------
OTHER AGENCY SECURITIES 22.2%
Federal Agriculture Mortgage Corp., 7.23%, 1/17/07 ........................ 5,000,000 5,294,515
Federal Farm Credit Bank, 5.80%, 9/16/03 .................................. 5,000,000 4,979,875
Federal Home Loan Bank, 0.00%, 8/15/22 .................................... 17,500,000 3,040,643
Federal Home Loan Bank, 0.00%, 1/23/23 .................................... 10,000,000 1,865,720
FICO, Strip, 0.00%, 3/07/02 ............................................... 10,000,000 8,556,040
FICO, Strip, 0.00%, 5/11/02 ............................................... 1,925,000 1,631,295
FICO, Strip, 0.00%, 5/11/13 ............................................... 10,000,000 4,377,890
FICO, Strip, 1, 0.00%, 5/11/09 ............................................ 1,758,000 1,005,374
FICO, Strip, 13, 0.00%, 6/27/09 ........................................... 11,024,000 6,250,685
FICO, Strip, 16, 0.00%, 4/05/09 ........................................... 3,202,000 1,843,596
FICO, Strip, 16, 0.00%, 10/05/10 .......................................... 4,745,000 2,470,883
FICO, Strip, A, 0.00%, 2/08/09 ............................................ 2,060,000 1,198,572
Housing Urban Development, 96-A, 7.63%, 8/01/14 ........................... 5,000,000 5,540,410
Housing Urban Development, 96-A, 7.66%, 8/01/15 ........................... 5,000,000 5,526,885
Small Business Administration, 6.00%, 9/01/18 ............................. 10,000,000 10,090,778
Small Business Administration, 6.45%, 12/01/15 ............................ 4,167,587 4,279,227
Small Business Administration, 6.70%, 12/01/16 ............................ 4,580,379 4,756,808
Small Business Administration, 6.85%, 7/01/17 ............................. 4,769,943 4,984,525
Small Business Administration, Cap 10.85%,
Margin Prime - 0.40%, Resets Quarterly, 8.10%, 6/25/19 .................... 5,907,985 6,201,538
Small Business Administration, Cap 10.875%,
Margin Prime - 0.125%, Resets Quarterly, 8.375%, 3/25/18 .................. 5,562,143 5,901,087
Student Loan Marketing Association, 0.00%, 5/15/14 ........................ 15,000,000 5,061,000
Tennessee Valley Authority, 0.00%, 4/15/03 ................................ 10,000,000 8,070,060
Tennessee Valley Authority, 0.00%, 4/15/42 ................................ 6,000,000 2,814,720
Tennessee Valley Authority, 0.00%, 7/15/43 ................................ 7,000,000 5,359,970
Tennessee Valley Authority, 5.88%, 4/01/36 ................................ 10,000,000 10,496,990
Tennessee Valley Authority, 6.125%, 7/15/03 ............................... 5,000,000 5,086,754
Tennessee Valley Authority, 6.235%, 7/15/45 ............................... 19,249,000 20,197,647
Tennessee Valley Authority, 7.25%, 7/15/43 ................................ 10,000,000 10,787,340
------------
TOTAL OTHER AGENCY SECURITIES (COST $146,222,419) ......................... 157,670,827
------------
U.S. GOVERNMENT SECURITIES .9%
U.S. Treasury, Strip, 0.00%, 2/15/19 (COST $5,196,200) .................... 20,000,000 6,546,580
------------
TOTAL LONG TERM INVESTMENTS (COST $674,193,318) ........................... 703,382,469
------------
</TABLE>
152
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT 2.2%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $15,368,660) (COST $15,360,671) .. $15,360,671 $ 15,360,671
Barclays Capital Inc. (Maturity Value $780,456)
Bear, Stearns & Co. Inc. (Maturity Value $202,341)
Chase Securities Inc. (Maturity Value $1,589,819)
CIBC Oppenheimer Corp. (Maturity Value $1,589,819)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,589,819)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,589,819)
Goldman, Sachs & Co. (Maturity Value $433,587)
Greenwich Capital Markets Inc. (Maturity Value $1,589,819)
Lehman Brothers Inc. (Maturity Value $289,058)
NationsBanc Montgomery Securities LLC (Maturity Value $1,589,819)
Paine Webber Inc. (Maturity Value $867,173)
Paribas Corp. (Maturity Value $1,589,819)
Warburg Dillon Read LLC (Maturity Value $1,667,312)
Collateralized by U.S. Treasury Bills & Notes
-------------
TOTAL INVESTMENTS (COST $689,553,989) 101.1% ................................................. 718,743,140
OTHER ASSETS, LESS LIABILITIES (1.1%) ........................................................ (7,911,217)
-------------
NET ASSETS 100.0% ............................................................................ $ 710,831,923
=============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
(h) Sufficient collateral has been segregated for securities traded on a
when-issue or delayed delivery basis.
See notes to financial statements.
153
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 88.4%
COMMERCIAL SERVICES 3.4%
(a) Corrections Corp. of America .............. 4,000 $ 70,500
(a) Kevco Inc. ................................ 300 2,175
Reynolds and Reynolds Co., A .............. 7,000 160,563
(a) Rush Enterprises Inc. ..................... 1,200 13,200
Unisource Worldwide Inc. .................. 9,000 65,250
----------
311,688
----------
CONSUMER DURABLES 6.1%
(a) Acorn Products Inc. ....................... 4,000 28,000
(a) Cannondale Corp. .......................... 8,700 78,300
Coachmen Industries Inc. .................. 3,000 78,750
D.R. Horton Inc. .......................... 2,500 57,500
(a) EKCO Group Inc. ........................... 2,100 7,875
Engle Homes Inc. .......................... 3,000 45,938
Flexsteel Industries Inc. ................. 6,000 77,250
M/I Schottenstein Homes Inc. .............. 3,000 66,000
(a) RockShox Inc. ............................. 600 1,538
(a) TBC Corp. ................................. 15,000 106,875
----------
548,026
----------
CONSUMER NON-DURABLES 13.7%
DIMON Inc. ................................ 14,500 107,844
Schweitzer-Mauduit International Inc. ..... 3,000 46,313
(a) Sola International Inc. ................... 7,500 129,375
Standard Commercial Corp. ................. 16,400 140,425
(a) The Timberland Co., A ..................... 4,000 182,250
(a) Tropical Sportswear International Corp. ... 12,800 459,200
Wolverine World Wide Inc. ................. 12,500 165,625
----------
1,231,032
----------
ELECTRONIC TECHNOLOGY 8.0%
(a) Alliant Techsystems Inc. .................. 1,000 82,438
Astro-Med Inc. ............................ 100 544
Elbit Systems (Israel) Ltd. ............... 7,500 90,000
(a) ESCO Electronics Corp. .................... 600 5,438
(a) FLIR Systems Inc. ......................... 4,000 93,000
(a) Komag Inc. ................................ 2,500 25,938
(a) Ladish Co. Inc. ........................... 13,000 108,875
(a) NCR Corp. ................................. 2,500 104,375
(a) Read-Rite Corp. ........................... 2,100 31,041
(a) SPACEHAB Inc. ............................. 10,000 105,000
United Industrial Corp. ................... 8,000 78,500
----------
725,149
----------
ENERGY MINERALS 1.1%
(a) Nuevo Energy Co. .......................... 8,800 101,200
----------
FINANCE 1.9%
Household International Inc. .............. 2,500 99,063
(a) PBOC Holdings Inc. ........................ 7,100 72,775
----------
171,838
----------
HEALTH TECHNOLOGY 1.9%
(a) DepoTech Corp. ............................ 4,900 11,331
(a) OrthoLogic Corp. .......................... 10,000 33,438
The West Co. Inc. ......................... 3,500 124,906
----------
169,675
----------
</TABLE>
154
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL SERVICES 6.4%
(a) Atwood Oceanics Inc. ..................... 5,000 $ 85,000
ENSCO International Inc. ................. 10,000 106,875
(a) Perini Corp. ............................. 11,000 56,375
(a) R&B Falcon Corp. ......................... 11,900 90,738
(a) Rowan Cos. Inc. .......................... 15,000 150,000
Santa Fe International Corp. ............. 6,000 87,750
----------
576,738
----------
INSURANCE 11.1%
(a) Acceptance Insurance Cos. Inc. ........... 4,500 91,125
(a) American Safety Insurance Group Ltd. ..... 12,500 120,313
The Centris Group Inc. ................... 10,000 97,500
Executive Risk Inc. ...................... 1,900 104,381
Penn-America Group Inc. .................. 10,000 90,625
The PMI Group Inc. ....................... 2,500 123,438
Presidential Life Corp. .................. 5,000 99,375
(a) Professional Group Inc. .................. 2,200 68,200
(a) The Seibels Bruce Group Inc. ............. 9,000 30,375
(a) Symons International Group Inc. .......... 10,000 72,500
Terra Nova (Bermuda) Holdings Ltd., A .... 4,000 101,000
----------
998,832
----------
NON-ENERGY MINERALS 3.1%
Carpenter Technology Corp. ............... 3,500 118,781
(a) Lone Star Technologies Inc. .............. 7,000 70,875
LTV Corp. ................................ 15,000 87,188
----------
276,844
----------
PROCESS INDUSTRIES 2.6%
RPM Inc. ................................. 9,000 144,000
Tuscarora Inc. ........................... 6,600 88,275
----------
232,275
----------
PRODUCER MANUFACTURING 18.3%
(a) Atchison Casting Corp. ................... 9,000 83,250
Baldor Electric Co. ...................... 7,000 141,750
Commercial Intertech Corp. ............... 400 5,175
Commonwealth Industries Inc. ............. 6,500 60,938
Dana Corp. ............................... 3,000 122,625
EASCO Inc. ............................... 10,000 77,500
Flowserve Corp. .......................... 1,600 26,500
(a) Global Industrial Technologies Inc. ...... 7,000 74,813
(a) Holophane Corp. .......................... 6,000 154,125
JLG Industries Inc. ...................... 17,000 265,625
(a) Keystone Consolidated Industries Inc. .... 4,400 35,750
Myers Industries Inc. .................... 4,000 114,750
Patrick Industries Inc. .................. 5,000 76,875
Superior Industries International Inc. ... 7,400 205,813
Timken Co. ............................... 8,000 151,000
Watts Industries Inc., A ................. 3,000 49,875
----------
1,646,364
----------
RETAIL TRADE 2.4%
(a) Duckwall-Alco Stores Inc. ................ 6,000 79,500
Haverty Furniture Co. Inc. ............... 100 2,100
Schultz Sav-O Stores Inc. ................ 3,000 49,500
(a) Syms Corp. ............................... 10,000 90,000
----------
221,100
----------
</TABLE>
155
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES 1.8%
(a) Brightpoint Inc. ............................................................................ 5,500 $ 75,625
(a) Manchester Equipment Co. Inc. ............................................................... 800 2,750
(a) Ultrak Inc. ................................................................................. 11,000 81,125
-----------
159,500
-----------
TRANSPORTATION 6.6%
(a) Alaska Air Group Inc. ....................................................................... 200 8,850
(a) Conrad Industries Inc. ...................................................................... 2,000 7,813
Delta Air Lines Inc. ........................................................................ 2,500 130,000
(a) Eagle USA Airfreight Inc. ................................................................... 2,800 68,600
(a) Fritz Cos. Inc. ............................................................................. 5,000 54,063
Kenan Transport Co. ......................................................................... 4,000 134,000
(a) Motor Cargo Industries Inc. ................................................................. 800 6,400
Tidewater Inc. .............................................................................. 8,000 185,492
-----------
595,218
-----------
TOTAL COMMON STOCKS (COST $8,367,867) ....................................................... 7,965,479
-----------
PRINCIPAL
AMOUNT
---------
(f) REPURCHASE AGREEMENT 13.9%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $1,252,577) (COST $1,251,926) .. $1,251,926 1,251,926
Barclays Capital Inc. (Maturity Value $63,609)
Bear, Stearns & Co. Inc. (Maturity Value $16,491)
Chase Securities Inc. (Maturity Value $129,573)
CIBC Oppenheimer Corp. (Maturity Value $129,573)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $129,573)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $129,573)
Goldman, Sachs & Co. (Maturity Value $35,339)
Greenwich Capital Markets Inc. (Maturity Value $129,573)
Lehman Brothers Inc. (Maturity Value $23,560)
NationsBanc Montgomery Securities LLC (Maturity Value $129,573)
Paine Webber Inc. (Maturity Value $70,677)
Paribas Corp. (Maturity Value $129,573)
Warburg Dillon Read LLC (Maturity Value $135,890)
Collateralized by U.S. Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $9,619,793) 102.3% ............................................................. 9,217,405
OTHER ASSETS, LESS LIABILITIES (2.3%) .................................................................. (203,934)
-----------
NET ASSETS 100.0% ...................................................................................... $ 9,013,471
===========
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
156
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2000 AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &AGENCY SECURITIES 97.1%
Chattanooga Valley Corp., 1/01/01 ..................................................... $ 65,000 $ 58,528
FHLB, Strip, A-1, 2/25/01 ............................................................. 7,567,000 6,807,326
FHLB, Strip, A-1, 8/25/01 ............................................................. 2,884,000 2,529,455
FHLB, Strip, A-1, 2/25/02 ............................................................. 465,000 397,999
FHLMC, Strip, 5/15/00 ................................................................. 16,175,000 15,165,179
FICO, Strip, 1, 11/11/00 .............................................................. 1,139,000 1,040,847
FICO, Strip, 7, 2/03/01 ............................................................... 1,000,000 902,783
FICO, Strip, 12, 12/06/00 ............................................................. 17,390,000 15,834,117
FICO, Strip, 15, 9/07/00 .............................................................. 148,000 136,438
FICO, Strip, 17, 10/05/00 ............................................................. 5,875,000 5,395,224
FICO, Strip, 10/06/00 ................................................................. 6,200,000 5,692,945
FICO, Strip, D, 9/26/00 ............................................................... 4,965,000 4,565,387
FNMA, Strip, 11/22/99 ................................................................. 3,800,000 3,642,840
FNMA, Strip, 1, 2/12/00 ............................................................... 500,000 474,031
FNMA, Strip, 1, 2/01/01 ............................................................... 1,875,000 1,693,879
FNMA, Strip, 8/12/01 .................................................................. 3,000,000 2,639,379
REFCO, Strip, 1/15/01 ................................................................. 5,195,000 4,723,398
Tennessee Valley Authority, Strip, 7/15/00 ............................................ 3,320,000 3,081,219
Tennessee Valley Authority, Strip, 10/15/00 ........................................... 2,500,000 2,291,970
Tennessee Valley Authority, Strip, 4/15/01 ............................................ 10,500,000 9,385,194
Tennessee Valley Authority, Strip, 4/15/02 ............................................ 1,000,000 850,211
U.S. Treasury, Strip, QO, 11/15/00 .................................................... 1,110,375 1,015,778
U.S. Treasury, Strip, QO, 2/15/01 ..................................................... 2,778,750 2,509,977
------------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $85,976,752) .......................... 90,834,104
------------
OTHER SECURITIES - "AAA" RATED 2.2%
Interamerican Development Bank, Strip, 12/16/00 ....................................... 220,000 200,166
International Bank for Reconstruction and Development, 2/15/00 ........................ 405,000 382,309
International Bank for Reconstruction and Development, 8/15/00 ........................ 945,000 868,856
International Bank for Reconstruction and Development, 2/15/01 ........................ 735,000 657,556
------------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $1,985,654) ................................ 2,108,887
------------
TOTAL LONG TERM INVESTMENTS (COST $87,962,406) ........................................ 92,942,991
============
(f) REPURCHASE AGREEMENT .7%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $645,610) (COST $645,274) . 645,274 645,274
Barclays Capital Inc. (Maturity Value $32,786)
Bear, Stearns & Co. Inc. (Maturity Value $8,500)
Chase Securities Inc. (Maturity Value $66,785)
CIBC Oppenheimer Corp. (Maturity Value $66,785)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $66,785)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $66,785)
Goldman, Sachs & Co. (Maturity Value $18,214)
Greenwich Capital Markets Inc. (Maturity Value $66,785)
Lehman Brothers Inc. (Maturity Value $12,144)
NationsBanc Montgomery Securities LLC (Maturity Value $66,785)
Paine Webber Inc. (Maturity Value $36,429)
Paribas Corp. (Maturity Value $66,785)
Warburg Dillon Read LLC (Maturity Value $70,042)
Collateralized by U. S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $88,607,680) 100.0% ........................................... 93,588,265
OTHER ASSETS, LESS LIABILITIES ........................................................ (45,439)
------------
NET ASSETS 100.0% ..................................................................... $ 93,542,826
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
157
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2005 AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY SECURITIES 95.8%
FHLB, Strip, A-1, 8/25/02 .......................................... $ 1,000,000 $ 834,026
FHLB, Strip, A-1, 2/25/04 .......................................... 9,110,000 7,037,994
FHLB, Strip, A-1P, 2/25/04 ......................................... 800,000 618,046
FICO, Strip, 3/26/05 ............................................... 5,000,000 3,642,105
FICO, Strip, 10/06/05 .............................................. 11,400,000 8,092,598
FICO, Strip, 1, 5/11/05 ............................................ 3,500,000 2,532,030
FICO, Strip, 1, 11/11/05 ........................................... 829,000 586,295
FICO, Strip, 12, 12/06/05 .......................................... 11,055,000 7,785,749
FICO, Strip, 13, 12/27/05 .......................................... 2,755,000 1,933,037
FICO, Strip, 15, 9/07/05 ........................................... 2,620,000 1,865,760
FICO, Strip, 19, 12/06/05 .......................................... 10,000,000 7,042,740
FICO, Strip, D, 9/26/05 ............................................ 6,799,000 4,831,879
FICO, Strip, E, 11/02/05 ........................................... 3,509,000 2,484,025
FNMA, Strip, 8/01/04 ............................................... 450,000 342,069
FNMA, Strip, 2/12/06 ............................................... 250,000 174,448
FNMA, Strip, 2/12/08 ............................................... 120,000 74,752
FNMA, Strip, 1, 2/01/05 ............................................ 6,000,000 4,417,896
FNMA, Strip, 1, 2/12/05 ............................................ 1,000,000 734,877
FNMA, Strip, 1, 8/12/05 ............................................ 875,000 626,316
FNMA, Strip, 1, 2/01/06 ............................................ 4,307,000 3,011,205
FNMA, Strip, 1, 8/01/06 ............................................ 530,000 361,541
FNMA, Strip, 1, 2/01/08 ............................................ 1,730,000 1,080,717
REFCO, Strip, 1/15/06 .............................................. 6,500,000 4,620,896
REFCO, Strip, 4/15/06 .............................................. 3,000,000 2,104,731
Tennessee Valley Authority, Strip, 10/15/04 ........................ 6,200,000 4,641,822
Tennessee Valley Authority, Strip, 4/15/05 ......................... 2,260,000 1,640,746
Tennessee Valley Authority, Strip, 10/15/05 ........................ 1,000,000 709,108
U.S. Treasury, Strip, 2/15/06 ...................................... 9,950,000 7,100,270
-----------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $67,881,940) ....... 80,927,678
-----------
OTHER SECURITIES - "AAA" RATED 3.9%
Exxon Capital Corp., 11/15/04 ...................................... 1,500,000 1,111,674
International Bank for Reconstruction and Development, 2/15/07 ..... 459,000 290,422
International Bank for Reconstruction and Development, 8/15/07 ..... 2,500,000 1,539,763
International Bank for Reconstruction and Development, 2, 2/15/07 .. 541,000 342,305
-----------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $2,939,551) ............. 3,284,164
-----------
TOTAL LONG TERM INVESTMENTS (COST $70,821,491) ..................... 84,211,842
-----------
</TABLE>
158
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2005 AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT .4%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $382,848) (COST $382,649) .. $ 382,649 $ 382,649
Barclays Capital Inc. (Maturity Value $19,442)
Bear, Stearns & Co. Inc. (Maturity Value $5,040)
Chase Securities Inc. (Maturity Value $39,604)
CIBC Oppenheimer Corp. (Maturity Value $39,604)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $39,604)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $39,604)
Goldman, Sachs & Co. (Maturity Value $10,801)
Greenwich Capital Markets Inc. (Maturity Value $39,604)
Lehman Brothers Inc. (Maturity Value $7,201)
NationsBanc Montgomery Securities LLC (Maturity Value $39,604)
Paine Webber Inc. (Maturity Value $21,602)
Paribas Corp. (Maturity Value $39,604)
Warburg Dillon Read LLC (Maturity Value $41,534)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $71,204,140) 100.1% ............................................ 84,594,491
OTHER ASSETS, LESS LIABILITIES (.1%) ................................................... (107,106)
------------
NET ASSETS 100.0% ...................................................................... $ 84,487,385
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
159
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2010 AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY SECURITIES 94.6%
FICO, Strip, 3/26/10 ................................................. $ 860,000 $ 463,538
FICO, Strip, 1, 11/11/10 ............................................. 16,246,000 8,404,787
FICO, Strip, 3, 5/30/10 .............................................. 2,000,000 1,065,000
FICO, Strip, 4, 10/06/10 ............................................. 1,528,000 795,544
FICO, Strip, 8, 8/03/10 .............................................. 3,021,000 1,590,381
FICO, Strip, 11, 2/08/11 ............................................. 2,837,000 1,443,060
FICO, Strip, 12, 6/06/09 ............................................. 4,550,000 2,589,937
FICO, Strip, 12, 12/06/10 ............................................ 7,500,000 3,861,720
FICO, Strip, 19, 6/06/10 ............................................. 9,800,000 5,212,718
FICO, Strip, 19, 12/06/10 ............................................ 2,080,000 1,070,984
FICO, Strip, A, 8/08/10 .............................................. 7,000,000 3,681,874
FICO, Strip, D, 9/26/10 .............................................. 860,000 448,588
FICO, Strip, GEN, 10/06/10 ........................................... 4,040,000 2,103,402
FICO, Strip, GEN, 4/06/11 ............................................ 5,000,000 2,516,895
FNMA, Strip, 8/12/09 ................................................. 1,975,000 1,117,858
FNMA, Strip, 8/12/10 ................................................. 1,230,000 651,638
FNMA, Strip, 1, 2/01/10 .............................................. 5,000,000 2,742,750
FNMA, Strip, 1, 8/01/10 .............................................. 8,250,000 4,379,075
FNMA, Strip, 1, 2/01/11 .............................................. 4,450,000 2,285,262
FNMA, Strip, 1, 2/01/12 .............................................. 3,281,000 1,576,127
REFCO, Strip, 10/15/10 ............................................... 20,000,000 10,688,840
REFCO, Strip, 1/15/11 ................................................ 8,000,000 4,204,280
SLMA, 5/15/14 ........................................................ 8,650,000 2,918,510
Tennessee Valley Authority, Strip, 1/01/10 ........................... 412,000 215,001
Tennessee Valley Authority, Strip, 4/15/10 ........................... 12,000,000 6,449,028
Tennessee Valley Authority, Strip, 10/15/10 .......................... 1,320,000 686,314
Tennessee Valley Authority, Strip, 4/15/11 ........................... 9,525,000 4,785,255
Tennessee Valley Authority, Strip, 10/15/11 .......................... 7,295,000 3,543,780
U.S. Treasury, Strip, 11/15/10 ....................................... 12,800,000 6,930,112
-----------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $69,037,726) ......... 88,422,258
-----------
OTHER SECURITIES - "AAA" RATED 5.5%
International Bank for Reconstruction and Development, 2/15/11 ....... 1,392,000 668,276
International Bank for Reconstruction and Development, 2/15/12 ....... 2,800,000 1,250,612
International Bank for Reconstruction and Development, 2/15/13 ....... 3,287,000 1,365,837
International Bank for Reconstruction and Development, 8/15/13 ....... 4,100,000 1,646,797
International Bank for Reconstruction and Development, 2, 2/15/11 .... 500,000 240,041
-----------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $4,272,695) ............... 5,171,563
-----------
TOTAL LONG TERM INVESTMENTS (COST $73,310,421) ....................... 93,593,821
-----------
</TABLE>
160
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2010 AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $53,432) (COST $53,404) .. $ 53,404 $ 53,404
Barclays Capital Inc. (Maturity Value $2,713)
Bear, Stearns & Co. Inc. (Maturity Value $703)
Chase Securities Inc. (Maturity Value $5,527)
CIBC Oppenheimer Corp. (Maturity Value $5,527)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $5,527)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $5,527)
Goldman, Sachs & Co. (Maturity Value $1,507)
Greenwich Capital Markets Inc. (Maturity Value $5,527)
Lehman Brothers Inc. (Maturity Value $1,006)
NationsBanc Montgomery Securities LLC (Maturity Value $5,527)
Paine Webber Inc. (Maturity Value $3,016)
Paribas Corp. (Maturity Value $5,527)
Warburg Dillon Read LLC (Maturity Value $5,798)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $73,363,825) 100.1% .......................................... 93,647,225
OTHER ASSETS, LESS LIABILITIES (.1%) ................................................. (132,090)
------------
NET ASSETS 100.0% .................................................................... $ 93,515,135
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
161
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
ARS - Argentinian Peso
BEF - Belgian Franc
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NLG - Dutch Guilder
NZD - New Zealand Dollar
SEK - Swedish Krona
ZAR - South African Rand
See notes to financial statements.
162
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND
----------- --------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ...................................... $ 142,185,516 $ 6,550,381 $748,493,181 $1,015,815,938 $ 457,417,080
--------------------------------------------------------------------------------
Value ..................................... 187,095,726 7,426,374 946,201,152 1,260,729,291 425,050,056
Repurchase agreements, at value and cost ... 33,464,304 1,769,229 29,050,000 58,455,701 13,387,706
Cash ....................................... -- 24,221 1,128 -- --
Receivables:
Investment securities sold ................ -- -- 17,328,213 1,034,588 --
Capital shares sold ....................... 539,496 -- 23,688 60,036 2,058
Dividends and interest .................... 128,922 235 1,403,733 3,784,327 8,844,805
--------------------------------------------------------------------------------
Total assets .......................... 221,228,448 9,220,059 994,007,914 1,324,063,943 447,284,625
--------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........... -- 222,739 5,063,024 3,781,601 --
Capital shares redeemed ................... 135,121 -- 1,733,597 960,778 456,857
Affiliates ................................ 134,817 5,107 393,731 524,357 194,902
Other liabilities .......................... 6,872 1,888 62,366 53,934 24,361
--------------------------------------------------------------------------------
Total liabilities ..................... 276,810 229,734 7,252,718 5,320,670 676,120
--------------------------------------------------------------------------------
Net assets, at value ................. $ 220,951,638 $ 8,990,325 $986,755,196 $1,318,743,273 $ 446,608,505
--------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ........ $ 1,509,991 $ 25,087 $ 32,999,590 $ 43,273,575 $ 48,138,649
Net unrealized appreciation (depreciation) . 44,910,210 875,993 197,707,971 244,907,533 (32,367,488)
Accumulated net realized gain (loss) ....... (3,520,262) (261,450) 79,916,030 119,084,055 12,077,601
Capital shares ............................. 178,051,699 8,350,695 676,131,605 911,478,110 418,759,743
--------------------------------------------------------------------------------
Net assets, at value ................. $ 220,951,638 $ 8,990,325 $986,755,196 $1,318,743,273 $ 446,608,505
--------------------------------------------------------------------------------
Shares outstanding .......................... 13,740,476 839,490 48,260,709 64,782,428 33,620,945
--------------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ............................... $ 16.08 $ 10.71 $ 20.45 $ 20.36 $ 13.28
--------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
163
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MUTUAL MUTUAL NATURAL
INCOME MONEY DISCOVERY SHARES RESOURCES
SECURITIES MARKET SECURITIES SECURITIES SECURITIES
FUND FUND FUND FUND FUND
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost .............................................. $1,081,875,650 $393,230,633 $ 213,660,535 $ 461,651,206 $ 52,749,663
----------------------------------------------------------------------------
Value ............................................. 1,154,588,474 393,230,633 215,213,658 480,791,143 42,557,132
Repurchase agreements, at value and cost ........... 9,198,596 19,910,000 2,300,000 -- 3,489,276
Cash ............................................... 3,298,193 323 11,594,947 5,893,637 14,658
Receivables:
Investment securities sold ........................ 4,325,719 -- 3,129,620 5,369,292 --
Capital shares sold ............................... -- 715,833 9,758 256,702 --
Dividends and interest ............................ 15,023,429 1,825,107 547,562 1,277,197 55,020
Unrealized gain on forward exchange contracts
(Note 6) ........................................... -- -- 846,014 758,135 --
Deposits with brokers for securities sold short .... -- -- 3,687,114 10,517,653 --
----------------------------------------------------------------------------
Total assets .................................. 1,186,434,411 415,681,896 237,328,673 504,863,759 46,116,086
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 35,056 -- 687,510 2,925,780 159,484
Capital shares redeemed ........................... -- 1,146,955 612,719 292,482 --
Affiliates ........................................ 478,706 179,699 178,262 298,913 23,882
Securities sold short, at value (proceeds $7,799,126
and $15,319,353) ................................... -- -- 9,311,593 17,992,108 --
Options written, at value (premiums received
$1,346 and $1,795) ................................. -- -- 113 150 --
Unrealized loss on forward exchange contracts
(Note 6) ........................................... -- -- 1,849,063 804,597 --
Other liabilities .................................. 80,762 14,484 33,236 106,042 5,674
----------------------------------------------------------------------------
Total liabilities ............................. 594,524 1,341,138 12,672,496 22,420,072 189,040
----------------------------------------------------------------------------
Net assets, at value ......................... $1,185,839,887 $414,340,758 $ 224,656,177 $ 482,443,687 $ 45,927,046
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................ $ 82,921,968 $ -- $ 4,105,301 $ 11,568,707 $ 727,057
Net unrealized appreciation (depreciation) ......... 72,712,190 -- (961,160) 16,640,674 (10,192,531)
Accumulated net realized gain (loss) ............... 28,754,109 -- (11,697,678) (9,697,437) (23,406,478)
Capital shares ..................................... 1,001,451,620 414,340,758 233,209,714 463,931,743 78,798,998
----------------------------------------------------------------------------
Net assets, at value ......................... $1,185,839,887 $414,340,758 $ 224,656,177 $ 482,443,687 $ 45,927,046
----------------------------------------------------------------------------
Shares outstanding .................................. 70,073,792 414,340,758 19,904,649 40,335,247 5,476,199
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ....................................... $ 16.92 $ 1.00 $ 11.29 $ 11.96 $ 8.39
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
164
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
REAL TEMPLETON TEMPLETON
ESTATE RISING DEVELOPING GLOBAL ASSET
SECURITIES DIVIDENDS SMALL CAP MARKETS ALLOCATION
FUND FUND FUND EQUITY FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................ $ 257,934,343* $ 562,238,731+ $ 278,870,540 $ 228,078,693 $ 77,076,589
-----------------------------------------------------------------------------
Value ........................................... 274,003,947* 734,636,200+ 295,130,887 161,884,954 75,890,946
Repurchase agreements, at value and cost ......... 5,101,060 18,542,602 28,535,341 -- 5,211,000
Cash ............................................. 166,718 -- -- -- 9,233
Receivables:
Investment securities sold ...................... 228,992 261,806 142,902 73,880 --
Capital shares sold ............................. 22,557 273,634 34,933 -- --
Dividends and interest .......................... 3,147,834 1,178,912 429,691 1,135,358 697,076
Unrealized gain on forward exchange contracts
(Note 6) ......................................... -- -- -- -- 1,481
-----------------------------------------------------------------------------
Total assets ................................ 282,671,108 754,893,154 324,273,754 163,094,192 81,809,736
-----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................. -- 1,917,039 -- -- --
Capital shares redeemed ......................... 237,504 643,226 292,126 197,597 19,390
Affiliates ...................................... 129,748 439,909 186,568 172,434 55,242
Funds advanced by custodian ...................... -- -- -- 213,410 --
Payable upon return of securities loaned (Note 10) -- -- 8,322,542 -- --
Unrealized loss on forward exchange contracts
(Note 6) ......................................... -- -- -- -- 2,317
Other liabilities ................................ 13,449 23,984 12,660 77,464 63,169
-----------------------------------------------------------------------------
Total liabilities ........................... 380,701 3,024,158 8,813,896 660,905 140,118
-----------------------------------------------------------------------------
Net assets, at value ....................... $ 282,290,407 $ 751,868,996 $ 315,459,858 $ 162,433,287 $ 81,669,618
-----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .............. $ 18,909,704 $ 9,359,456 $ 1,532,535 $ 3,107,117 $ 2,772,913
Net unrealized appreciation (depreciation) ....... 16,069,604 172,397,469 16,260,347 (66,193,739) (1,180,331)
Accumulated net realized gain (loss) ............. 24,496,142 93,364,473 (334,864) (36,634,757) 3,482,850
Capital shares ................................... 222,814,957 476,747,598 298,001,840 262,154,666 76,594,186
-----------------------------------------------------------------------------
Net assets, at value ....................... $ 282,290,407 $ 751,868,996 $ 315,459,858 $ 162,433,287 $ 81,669,618
-----------------------------------------------------------------------------
Shares outstanding ................................ 14,164,554 41,526,463 22,999,329 23,505,375 6,446,500
-----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ..................................... $ 19.93 $ 18.11 $ 13.72 $ 6.91 $ 12.67
-----------------------------------------------------------------------------
</TABLE>
* Includes non-controlled affiliated issuer in the amount of $6,286,337 and
$3,412,500 for cost and value, respectively.
+ Includes non-controlled affiliated issuer in the amount of $22,139,964 and
$27,989,706 for cost and value, respectively.
See notes to financial statements.
165
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON
TEMPLETON TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON
GLOBAL GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC
GROWTH FUND SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ....................................... $ 655,019,443 $ 141,515,105 $ 687,390,373 $ 27,037,946 $ 173,769,693
----------------------------------------------------------------------------
Value ...................................... 700,579,123 144,317,858 849,885,524 23,513,325 100,069,876
Repurchase agreements, at value and cost .... 42,669,000 3,960,000 109,252,000 1,468,000 --
Cash ........................................ 9,339 1,874 -- 7,190 --
Receivables:
Investment securities sold ................. 3,758,570 -- 480,000 -- 607,835
Capital shares sold ........................ -- 913 -- -- --
Dividends and interest ..................... 1,686,886 2,906,410 2,753,257 71,891 675,679
Unrealized gain on forward exchange contracts
(Note 6) .................................... -- 10,712 -- -- --
----------------------------------------------------------------------------
Total assets ........................... 748,702,918 151,197,767 962,370,781 25,060,406 101,353,390
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............ 417,525 -- 3,696,126 6,555 --
Capital shares redeemed .................... 585,215 122,674 1,753,180 26,991 85,873
Affiliates ................................. 519,850 72,212 658,812 21,402 102,410
Funds advanced by custodian ................. -- -- 55,867 -- 2,323,184
Unrealized loss on forward exchange contracts
(Note 6) .................................... -- 18,845 -- -- --
Other liabilities ........................... 99,974 43,299 306,694 6,014 72,538
----------------------------------------------------------------------------
Total liabilities ...................... 1,622,564 257,030 6,470,679 60,962 2,584,005
----------------------------------------------------------------------------
Net assets, at value .................. $ 747,080,354 $ 150,940,737 $ 955,900,102 $ 24,999,444 $ 98,769,385
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ......... $ 14,679,029 $ 4,943,426 $ 30,263,329 $ 620,960 $ --
Net unrealized appreciation (depreciation) .. 45,559,680 2,852,819 162,495,151 (3,524,621) (73,618,565)
Accumulated net realized gain (loss) ........ 75,861,313 (3,498,798) 24,069,715 (2,543,970) (24,677,894)
Capital shares .............................. 610,980,332 146,643,290 739,071,907 30,447,075 197,065,844
----------------------------------------------------------------------------
Net assets, at value .................. $ 747,080,354 $ 150,940,737 $ 955,900,102 $ 24,999,444 $ 98,769,385
----------------------------------------------------------------------------
Shares outstanding ........................... 50,584,398 11,725,182 61,584,184 2,718,508 13,152,815
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ................................ $ 14.77 $ 12.87 $ 15.52 $ 9.20 $ 7.51
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
166
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. VALUE
GOVERNMENT SECURITIES ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND FUND - 2000 FUND - 2005 FUND - 2010
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ..................................... $ 674,193,318 $ 8,367,867 $ 87,962,406 $ 70,821,491 $ 73,310,421
----------------------------------------------------------------------------
Value .................................... 703,382,469 7,965,479 92,942,991 84,211,842 93,593,821
Repurchase agreements, at value and cost .. 15,360,671 1,251,926 645,274 382,649 53,404
Receivables:
Investment securities sold ............... -- 22,247 -- -- --
Capital shares sold ...................... -- 133,540 -- 14,850 43,524
Dividends and interest ................... 5,488,362 5,341 -- -- --
----------------------------------------------------------------------------
Total assets ......................... 724,231,502 9,378,533 93,588,265 84,609,341 93,690,749
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .......... 12,745,746 358,183 -- -- --
Capital shares redeemed .................. 328,206 -- 2,404 92,839 56,949
Affiliates ............................... 295,171 4,994 34,865 21,567 110,539
Other liabilities ......................... 30,456 1,885 8,170 7,550 8,126
----------------------------------------------------------------------------
Total liabilities .................... 13,399,579 365,062 45,439 121,956 175,614
----------------------------------------------------------------------------
Net assets, at value ................ $ 710,831,923 $ 9,013,471 $ 93,542,826 $ 84,487,385 $ 93,515,135
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ....... $ 45,248,069 $ 28,176 $ 6,716,921 $ 4,635,667 $ 4,906,277
Net unrealized appreciation (depreciation) 29,189,151 (402,388) 4,980,585 13,390,351 20,283,400
Accumulated net realized gain (loss) ...... (12,922,414) (90,040) 1,751,873 453,275 2,226,393
Capital shares ............................ 649,317,117 9,477,723 80,093,447 66,008,092 66,099,065
----------------------------------------------------------------------------
Net assets, at value ................ $ 710,831,923 $ 9,013,471 $ 93,542,826 $ 84,487,385 $ 93,515,135
----------------------------------------------------------------------------
Shares outstanding ......................... 51,193,736 1,156,792 6,315,319 4,761,895 4,908,874
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value / shares outstanding) .... $ 13.89 $ 7.79 $ 14.81 $ 17.74 $ 19.05
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
167
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL
HEALTH GLOBAL
CARE UTILITIES
CAPITAL SECURITIES SECURITIES GROWTH AND HIGH
GROWTH FUND FUND* FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 1,068,089 $ 5,185 $ 37,119,920 $ 46,208,572 $ 244,920
Interest ...................................... 1,612,127 45,137 1,161,718 4,365,468 50,773,641
-----------------------------------------------------------------------------
Total investment income .................. 2,680,216 50,322 38,281,638 50,574,040 51,018,561
-----------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 1,140,016 18,119 4,965,295 6,301,582 2,439,509
Administrative fees (Note 3) .................. -- 4,471 -- -- --
Custodian fees ................................ 1,615 22 99,063 47,225 8,924
Reports to shareholders ....................... 15,378 498 108,980 139,864 50,903
Professional fees ............................. 6,705 1,712 36,523 53,497 17,850
Trustees' fees and expenses ................... 1,008 21 7,236 9,160 3,354
Other ......................................... 961 392 24,903 12,909 34,077
-----------------------------------------------------------------------------
Total expenses ........................... 1,165,683 25,235 5,242,000 6,564,237 2,554,617
-----------------------------------------------------------------------------
Net investment income ................... 1,514,533 25,087 33,039,638 44,009,803 48,463,944
-----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. (3,325,719) (261,450) 79,996,534 119,205,524 12,088,286
Foreign currency transactions ................ -- -- 11,911 (50,228) (224,547)
-----------------------------------------------------------------------------
Net realized gain (loss) ................. (3,325,719) (261,450) 80,008,445 119,155,296 11,863,739
Net unrealized appreciation (depreciation) on:
Investments .................................. 31,691,954 875,993 (5,717,447) (59,408,790) (53,339,220)
Translation of assets and liabilities
denominated in foreign currencies ........... -- -- 2,364 3,934 13,234
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 31,691,954 875,993 (5,715,083) (59,404,856) (53,325,986)
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 28,366,235 614,543 74,293,362 59,750,440 (41,462,247)
-----------------------------------------------------------------------------
Net increase in net assets resulting
from operations ............................... $ 29,880,768 $ 639,630 $ 107,333,000 $ 103,760,243 $ 7,001,697
-----------------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
+ Net of foreign taxes of $13,205, $57, $425,340 and $351,522 for the Capital
Growth Fund, the Global Health Care Securities Fund, the Global Utilities
Securities Fund, and the Growth and Income Fund, respectively.
See notes to financial statements.
168
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MUTUAL MUTUAL NATURAL
INCOME DISCOVERY SHARES RESOURCES
SECURITIES MONEY SECURITIES SECURITIES SECURITIES
FUND MARKET FUND FUND FUND FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 31,421,627 $ -- $ 4,294,930 $ 8,857,531 $ 805,210
Interest ...................................... 65,763,832 21,340,606 2,702,240 7,107,398 346,769
------------------------------------------------------------------------
Total investment income .................. 97,185,459 21,340,606 6,997,170 15,964,929 1,151,979
------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 6,133,729 1,986,485 1,904,631 2,841,641 388,527
Administrative fees (Note 3) .................. -- -- 351,377 669,378 --
Custodian fees ................................ 96,395 3,786 91,000 51,300 1,725
Reports to shareholders ....................... 136,588 40,329 22,600 36,000 4,916
Professional fees ............................. 53,391 13,749 3,100 12,900 2,736
Trustees' fees and expenses ................... 8,537 2,687 1,200 2,400 436
Other ......................................... 35,233 4,865 3,058 13,311 2,477
------------------------------------------------------------------------
Total expenses ........................... 6,463,873 2,051,901 2,376,966 3,626,930 400,817
Expenses waived/paid by affiliate (Note 3) -- (315,182) -- -- --
------------------------------------------------------------------------
Net expenses ............................ 6,463,873 1,736,719 2,376,966 3,626,930 400,817
------------------------------------------------------------------------
Net investment income .................. 90,721,586 19,603,887 4,620,204 12,337,999 751,162
------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. 28,796,475 (371) (10,611,221) (9,941,502) (16,971,708)
Foreign currency transactions ................ (7,046,358) -- (715,707) 438,970 (17,206)
------------------------------------------------------------------------
Net realized gain (loss) ................. 21,750,117 (371) (11,326,928) (9,502,532) (16,988,914)
Net unrealized appreciation (depreciation) on:
Investments .................................. (93,215,595) -- (10,438,388) (8,452,402) (1,662,180)
Translation of assets and liabilities
denominated in foreign currencies ........... 11,645 -- (2,128,595) (514,841) 3
------------------------------------------------------------------------
Net unrealized depreciation .............. (93,203,950) -- (12,566,983) (8,967,243) (1,662,177)
------------------------------------------------------------------------
Net realized and unrealized loss ............... (71,453,833) (371) (23,893,911) (18,469,775) (18,651,091)
------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 19,267,753 $ 19,603,516 $(19,273,707) $ (6,131,776) $(17,899,929)
------------------------------------------------------------------------
</TABLE>
+ Net of foreign taxes of $52,282, $513,671, $342,801, and $35,332 for the
Income Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, and the Natural Resources Securities Fund, respectively.
See notes to financial statements.
169
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
REAL ESTATE DEVELOPING GLOBAL ASSET
SECURITIES RISING SMALL CAP MARKETS ALLOCATION
FUND DIVIDENDS FUND FUND EQUITY FUND FUND
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ............................ $ 21,149,114 $ 14,098,193* $ 2,319,218 $ 6,153,898 $ 2,000,965
Interest ............................. 911,621 907,840 1,708,834 1,121,539 2,647,941
------------------------------------------------------------------------------
Total investment income ......... 22,060,735 15,006,033 4,028,052 7,275,437 4,648,906
------------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ............. 1,911,113 5,508,829 2,365,309 2,633,409 585,747
Administrative fees (Note 3) ......... -- -- -- -- 135,172
Custodian fees ....................... 3,730 7,834 4,422 268,600 22,000
Reports to shareholders .............. 40,125 82,436 34,998 30,500 10,200
Professional fees .................... 14,409 28,662 13,196 30,100 4,200
Trustees' fees and expenses .......... 2,538 5,309 2,123 1,100 700
Other ................................ 4,389 8,313 4,592 5,617 654
------------------------------------------------------------------------------
Total expenses .................. 1,976,304 5,641,383 2,424,640 2,969,326 758,673
------------------------------------------------------------------------------
Net investment income .......... 20,084,431 9,364,650 1,603,412 4,306,111 3,890,233
------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ......................... 24,686,332 93,670,542 (193,079) (27,190,328) 3,090,420
Foreign currency transactions ....... -- -- (36,347) (499,650) (372,191)
------------------------------------------------------------------------------
Net realized gain (loss) ........ 24,686,332 93,670,542 (229,426) (27,689,978) 2,718,229
Net unrealized (depreciation) on:
Investments .......................... (114,230,527) (58,097,205) (8,381,265) (32,987,790) (7,245,483)
Translation of assets and liabilities
denominated in foreign currencies ... -- -- -- -- (100,044)
------------------------------------------------------------------------------
Net unrealized depreciation ..... (114,230,527) (58,097,205) (8,381,265) (32,987,790) (7,345,527)
------------------------------------------------------------------------------
Net realized and unrealized gain loss . (89,544,195) 35,573,337 (8,610,691) (60,677,768) (4,627,298)
------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ $ (69,459,764) $ 44,937,987 $ (7,007,279) $ (56,371,657) $ (737,065)
------------------------------------------------------------------------------
</TABLE>
* Includes non-controlled affiliated issuer in the amount of $255,193.
+ Net of foreign taxes of $38,811, $445,131, $32,708 and $183,011 for the Rising
Dividends Fund, the Small Cap Fund, the Templeton Developing Markets Equity
Fund, and the Templeton Global Asset Allocation Fund, respectively.
See notes to financial statements.
170
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON
GLOBAL TEMPLETON
TEMPLETON INCOME TEMPLETON INTERNATIONAL TEMPLETON
GLOBAL SECURITIES INTERNATIONAL SMALLER PACIFIC
GROWTH FUND FUND EQUITY FUND COMPANIES FUND GROWTH FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 19,581,841 $ 243 $ 31,699,971 $ 933,588 $ 4,230,810
Interest ...................................... 4,859,793 12,503,384 10,196,096 95,262 52,701
---------------------------------------------------------------------------
Total investment income .................. 24,441,634 12,503,627 41,896,067 1,028,850 4,283,511
---------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 6,409,332 959,858 8,900,761 259,908 1,142,027
Administrative fees (Note 3) .................. -- -- -- 45,867 --
Custodian fees ................................ 269,500 57,636 634,000 27,731 87,500
Reports to shareholders ....................... 104,500 24,000 159,300 2,250 26,000
Professional fees ............................. 29,900 8,900 49,800 1,900 8,000
Trustees' fees and expenses ................... 4,600 1,400 7,300 50 850
Other ......................................... 3,682 2,961 25,789 58 7,214
---------------------------------------------------------------------------
Total expenses ........................... 6,821,514 1,054,755 9,776,950 337,764 1,271,591
---------------------------------------------------------------------------
Net investment income ................... 17,620,120 11,448,872 32,119,117 691,086 3,011,920
---------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. 75,957,066 (3,425,137) 24,331,207 (2,302,755) (24,293,928)
Foreign currency transactions ................ 196,827 (2,195,341) (325,036) (31,341) 144,285
---------------------------------------------------------------------------
Net realized gain (loss) ................. 76,153,893 (5,620,478) 24,006,171 (2,334,096) (24,149,643)
Net unrealized appreciation (depreciation) on:
Investments .................................. (33,429,013) 6,156,507 3,813,638 (2,246,892) (1,884,835)
Translation of assets and liabilities
denominated in foreign currencies ........... -- (736,758) -- 22,578 81,252
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) (33,429,013) 5,419,749 3,813,638 (2,224,314) (1,803,583)
---------------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 42,724,880 (200,729) 27,819,809 (4,558,410) (25,953,226)
---------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 60,345,000 $ 11,248,143 $ 59,938,926 $ (3,867,324) $(22,941,306)
---------------------------------------------------------------------------
</TABLE>
+ Net of foreign taxes of $1,986,307, $3,957,832, $117,899 and $355,098 for the
Templeton Global Growth Fund, Templeton International Equity Fund, the Templeton
International Smaller Companies Fund and the Templeton Pacific Growth Fund,
respectively.
See notes to financial statements.
171
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S.
GOVERNMENT VALUE
SECURITIES SECURITIES ZERO COUPON ZERO COUPON ZERO COUPON
FUND FUND* FUND - 2000 FUND - 2005 FUND - 2010
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends ..................................... $ -- $ 26,282 $ -- $ -- $ --
Interest ...................................... 49,026,676 26,594 7,174,486 4,958,805 5,265,740
-----------------------------------------------------------------------
Total investment income .................. 49,026,676 52,876 7,174,486 4,958,805 5,265,740
-----------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 3,530,641 17,968 639,490 498,204 552,900
Administrative fees (Note 3) .................. -- 4,433 -- -- --
Custodian fees ................................ 7,184 33 1,062 1,223 886
Reports to shareholders ....................... 74,069 450 10,627 8,756 9,681
Professional fees ............................. 25,721 1,619 4,986 4,295 4,526
Trustees' fees and expenses ................... 5,051 20 706 551 610
Other ......................................... 34,751 177 11,858 10,626 11,935
-----------------------------------------------------------------------
Total expenses ........................... 3,677,417 24,700 668,729 523,655 580,538
Expenses waived/paid by affiliate (Note 3) -- -- (261,500) (205,730) (226,405)
-----------------------------------------------------------------------
Net expenses ............................ 3,677,417 24,700 407,229 317,925 354,133
-----------------------------------------------------------------------
Net investment income .................. 45,349,259 28,176 6,767,257 4,640,880 4,911,607
-----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ..... 2,808,941 (90,040) 1,752,805 454,474 2,320,295
Net unrealized appreciation (depreciation) on
investments ................................... 3,506,133 (402,388) (1,138,823) 4,293,862 4,482,254
-----------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 6,315,074 (492,428) 613,982 4,748,336 6,802,549
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 51,664,333 $ (464,252) $ 7,381,239 $ 9,389,216 $ 11,714,156
-----------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
172
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
GLOBAL
HEALTH CARE
SECURITIES
CAPITAL GROWTH FUND FUND GLOBAL UTILITIES SECURITIES FUND
-------------------------------------------------------------------------------
1998 1997 1998* 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 1,514,533 $ 538,149 $ 25,087 $ 33,039,638 $ 42,454,900
Net realized gain (loss) from
investments and foreign
currency transactions .................. (3,325,719) (58,087) (261,450) 80,008,445 61,850,100
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ..................... 31,691,954 11,235,806 875,993 (5,715,083) 150,455,147
-------------------------------------------------------------------------------
Net increase in net assets
resulting from operations .......... 29,880,768 11,715,868 639,630 107,333,000 254,760,147
Distributions to shareholders from:
Net investment income ................... (539,187) (109,761) -- (42,481,848) (54,348,880)
Net realized gains ...................... -- -- -- (61,944,426) (75,198,357)
-------------------------------------------------------------------------------
Total distributions to shareholders ...... (539,187) (109,761) -- (104,426,274) (129,547,237)
Capital share transactions (Note 2) ...... 82,255,070 53,082,169 8,350,695 (146,055,631) (197,599,129)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets 111,596,651 64,688,276 8,990,325 (143,148,905) (72,386,219)
Net assets:
Beginning of year ........................ 109,354,987 44,666,711 -- 1,129,904,101 1,202,290,320
-------------------------------------------------------------------------------
End of year .............................. $ 220,951,638 $ 109,354,987 $ 8,990,325 $ 986,755,196 $ 1,129,904,101
-------------------------------------------------------------------------------
Undistributed net investment income
included in net assets:
End of year ............................. $ 1,509,991 $ 534,645 $ 25,087 $ 32,999,590 $ 42,429,889
-------------------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
173
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND HIGH INCOME FUND INCOME SECURITIES FUND
-----------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
Operations:
Net investment income $ 44,009,803 $ 42,540,625 $ 48,463,944 $ 44,024,339 $ 90,721,586 $ 102,082,393
Net realized gain from
investments
and foreign currency
transactions 119,155,296 102,492,523 11,863,739 2,599,594 21,750,117 24,171,050
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies (59,404,856) 149,143,638 (53,325,986) 2,724,359 (93,203,950) 88,386,427
-----------------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations 103,760,243 294,176,786 7,001,697 49,348,292 19,267,753 214,639,870
Distributions to shareholders
from:
Net investment income (43,569,458) (39,059,424) (44,113,847) (37,006,747) (102,762,930) (99,613,761)
Net realized gains (102,500,145) (37,881,070) (2,617,950) (1,213,933) (24,268,308) (21,398,124)
-----------------------------------------------------------------------------------------------
Total distributions to
shareholders (146,069,603) (76,940,494) (46,731,797) (38,220,680) (127,031,238) (121,011,885)
Capital share transactions
(Note 2) 22,576,507 43,250,826 (9,697,227) 38,812,695 (113,183,247) (37,500,786)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets (19,732,853) 260,487,118 (49,427,327) 49,940,307 (220,946,732) 56,127,199
Net assets:
Beginning of year 1,338,476,126 1,077,989,008 496,035,832 446,095,525 1,406,786,619 1,350,659,420
-----------------------------------------------------------------------------------------------
End of year $1,318,743,273 $1,338,476,126 $446,608,505 $496,035,832 $1,185,839,887 $1,406,786,619
-----------------------------------------------------------------------------------------------
Undistributed net investment
income included in net assets:
End of year $ 43,273,575 $ 42,883,458 $ 48,138,649 $ 44,013,099 $ 82,921,968 $ 102,009,670
-----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
174
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
MUTUAL DISCOVERY MUTUAL SHARES
MONEY MARKET FUND SECURITIES FUND SECURITIES FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 19,603,887 $ 20,721,147 $ 4,620,204 $ 2,280,806 $ 12,337,999 $ 4,433,846
Net realized gain (loss) from
investments and foreign
currency transactions ........... (371) -- (11,326,928) 3,239,880 (9,502,532) 4,245,422
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies .............. -- -- (12,566,983) 11,417,973 (8,967,243) 25,039,574
---------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations .................. 19,603,516 20,721,147 (19,273,707) 16,938,659 (6,131,776) 33,718,842
Distributions to shareholders from:
Net investment income ............ (19,603,516) (20,721,147) (3,306,778) (49,403) (5,124,853) (87,831)
Net realized gains ............... -- -- (3,076,305) -- (4,478,333) --
---------------------------------------------------------------------------------------------
Total distributions to
shareholders ..................... (19,603,516) (20,721,147) (6,383,083) (49,403) (9,603,186) (87,831)
Capital share transactions
(Note 2) .......................... 46,891,619 (41,480,674) 51,660,205 166,345,776 110,391,317 326,479,399
---------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets .................. 46,891,619 (41,480,674) 26,003,415 183,235,032 94,656,355 360,110,410
Net assets:
Beginning of year ................. 367,449,139 408,929,813 198,652,762 15,417,730 387,787,332 27,676,922
---------------------------------------------------------------------------------------------
End of year ....................... $ 414,340,758 $ 367,449,139 $ 224,656,177 $ 198,652,762 $ 482,443,687 $ 387,787,332
---------------------------------------------------------------------------------------------
Undistributed net investment income
included in net assets:
End of year ...................... $ -- $ -- $ 4,105,301 $ 2,888,764 $ 11,568,707 $ 4,591,164
---------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
175
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NATURAL RESOURCES REAL ESTATE RISING
SECURITIES FUND SECURITIES FUND DIVIDENDS FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 751,162 $ 936,102 $ 20,084,431 $ 13,879,598 $ 9,364,650 $ 8,597,527
Net realized gain (loss) from
investments and foreign
currency transactions ............. (16,988,914) (6,076,012) 24,686,332 9,523,858 93,670,542 105,385,082
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (1,662,177) (13,803,725) (114,230,527) 50,445,063 (58,097,205) 80,215,085
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets resulting from
operations ........................ (17,899,929) (18,943,635) (69,459,764) 73,848,519 44,937,987 194,197,694
Distributions to shareholders from:
Net investment income ............ (946,913) (1,423,769) (15,362,062) (10,951,988) (8,600,227) (9,956,520)
Net realized gains ............... -- -- (9,509,537) (5,229,900) (105,391,578) (17,001,263)
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to
shareholders ...................... (946,913) (1,423,769) (24,871,599) (16,181,888) (113,991,805) (26,957,783)
Capital share transactions
(Note 2) .......................... (10,150,422) (14,286,871) (63,932,493) 60,166,437 40,625,030 15,634,172
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets ........................ (28,997,264) (34,654,275) (158,263,856) 117,833,068 (28,428,788) 182,874,083
Net assets:
Beginning of year ................. 74,924,310 109,578,585 440,554,263 322,721,195 780,297,784 597,423,701
------------- ------------- ------------- ------------- ------------- -------------
End of year ....................... $ 45,927,046 $ 74,924,310 $ 282,290,407 $ 440,554,263 $ 751,868,996 $ 780,297,784
============= ============= ============= ============= ============= =============
Undistributed net investment income
included in net assets:
End of year ...................... $ 727,057 $ 940,017 $ 18,909,704 $ 14,187,335 $ 9,359,456 $ 8,595,033
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
176
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
SMALL CAP FUND DEVELOPING MARKETS EQUITY FUND GLOBAL ASSET ALLOCATION FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .............. $ 1,603,412 $ 154,966 $ 4,306,111 $ 5,379,345 $ 3,890,233 $ 3,416,577
Net realized gain (loss) from
investments and foreign
currency transactions ............... (229,426) 25,783,381 (27,689,978) 14,814,772 2,718,229 3,506,166
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies .................. (8,381,265) 14,228,539 (32,987,790) (53,104,360) (7,345,527) 1,145,033
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets resulting from
operations .......................... (7,007,279) 40,166,886 (56,371,657) (32,910,243) (737,065) 8,067,776
Distributions to shareholders from:
Net investment income .............. (201,399) (573,457) (7,007,398) (3,987,427) (3,274,568) (1,548,504)
Net realized gains ................. (25,854,889) (6,796,191) (22,786,132) (6,324,884) (3,894,373) (446,684)
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to
shareholders ........................ (26,056,288) (7,369,648) (29,793,530) (10,312,311) (7,168,941) (1,995,188)
Capital share transactions
(Note 2) ............................ 35,061,886 109,695,331 (31,081,577) 50,804,184 (3,826,198) 31,055,108
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets .......................... 1,998,319 142,492,569 (117,246,764) 7,581,630 (11,732,204) 37,127,696
Net assets:
Beginning of year ................... 313,461,539 170,968,970 279,680,051 272,098,421 93,401,822 56,274,126
------------- ------------- ------------- ------------- ------------- -------------
End of year ......................... $ 315,459,858 $ 313,461,539 $ 162,433,287 $ 279,680,051 $ 81,669,618 $ 93,401,822
============= ============= ============= ============= ============= =============
Undistributed net investment income
included in net assets:
End of year ........................ $ 1,532,535 $ 160,082 $ 3,107,117 $ 4,921,147 $ 2,772,913 $ 2,954,949
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
177
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON GLOBAL TEMPLETON GLOBAL TEMPLETON INTERNATIONAL
GROWTH FUND INCOME SECURITIES FUND EQUITY FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 17,620,120 $ 17,575,343 $ 11,448,872 $ 14,187,376 $ 32,119,117 $ 36,435,795
Net realized gain (loss) from
investments and foreign
currency transactions ............. 76,153,893 73,768,401 (5,620,478) (228,933) 24,006,171 71,056,314
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (33,429,013) (9,386,358) 5,419,749 (9,238,900) 3,813,638 24,358,754
------------ ------------ ------------ ------------- -------------- ---------------
Net increase in net
assets resulting from
operations ........................ 60,345,000 81,957,386 11,248,143 4,719,543 59,938,926 131,850,863
Distributions to shareholders from:
Net investment income ............ (20,206,508) (11,070,041) (12,370,027) (14,522,463) (34,702,026) (32,476,317)
Net realized gains ............... (73,600,973) (3,690,014) -- -- (69,708,108) (49,797,020)
------------ ------------ ------------ ------------- -------------- ---------------
Total distributions to
shareholders ...................... (93,807,481) (14,760,055) (12,370,027) (14,522,463) (104,410,134) (82,273,337)
Capital share transactions
(Note 2) .......................... 22,098,260 111,369,857 (32,953,553) (26,903,375) (161,058,239) 3,752,649
------------ ------------ ------------ ------------- -------------- ---------------
Net increase (decrease) in
net assets ........................ (11,364,221) 178,567,188 (34,075,437) (36,706,295) (205,529,447) 53,330,175
Net assets:
Beginning of year ................. 758,444,575 579,877,387 185,016,174 221,722,469 1,161,429,549 1,108,099,374
------------ ------------ ------------ ------------- -------------- ---------------
End of year ....................... $747,080,354 $758,444,575 $150,940,737 $ 185,016,174 $ 955,900,102 $ 1,161,429,549
============ ============ ============ ============= ============== ===============
Undistributed net investment
income included in net assets:
End of year ...................... $ 14,679,029 $ 17,068,595 $ 4,943,426 $ 11,163,308 $ 30,263,329 $ 33,171,270
============ ============ ============ ============= ============== ===============
</TABLE>
See notes to financial statements.
178
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL TEMPLETON PACIFIC U.S. GOVERNMENT
SMALLER COMPANIES FUND GROWTH FUND SECURITIES FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 691,086 $ 770,264 $ 3,011,920 $ 5,575,047 $ 45,349,259 $ 50,859,278
Net realized gain (loss) from
investments and foreign
currency transactions ............. (2,334,096) 573,090 (24,149,643) 5,990,468 2,808,941 84,959
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (2,224,314) (2,404,379) (1,803,583) (112,006,306) 3,506,133 18,636,570
------------- ----------- ------------- ------------- ------------ -------------
Net increase (decrease) in
net assets resulting from
operations ........................ (3,867,324) (1,061,025) (22,941,306) (100,440,791) 51,664,333 69,580,807
Distributions to shareholders from:
Net investment income ............ (741,651) (155,776) (5,322,439) (5,815,823) (50,958,932) (42,870,826)
Net realized gains ............... (858,571) -- (1,619,542) -- -- --
------------- ----------- ------------- ------------- ------------ -------------
Total distributions to
shareholders ...................... (1,600,222) (155,776) (6,941,981) (5,815,823) (50,958,932) (42,870,826)
Capital share transactions
(Note 2) .......................... (1,733,715) 17,162,468 (36,751,143) (85,098,729) (54,957,919) (105,483,057)
------------- ----------- ------------- ------------- ------------ -------------
Net increase (decrease) in
net assets ........................ (7,201,261) 15,945,667 (66,634,430) (191,355,343) (54,252,518) (78,773,076)
Net assets:
Beginning of year ................. 32,200,705 16,255,038 165,403,815 356,759,158 765,084,441 843,857,517
------------- ----------- ------------- ------------- ------------ -------------
End of year ....................... $ 24,999,444 $32,200,705 $ 98,769,385 $ 165,403,815 $710,831,923 $ 765,084,441
============= =========== ============= ============= ============ =============
Undistributed net investment
income included in net assets:
End of year ...................... $ 620,960 $ 716,993 $ -- $ 1,603,896 $ 45,248,069 $ 50,857,742
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
179
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
VALUE
SECURITIES FUND ZERO COUPON FUND - 2000
----------------------------------------------------
1998* 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................. $ 28,176 $ 6,767,257 $ 7,759,046
Net realized gain (loss) from investments ......................... (90,040) 1,752,805 1,248,982
Net unrealized depreciation on investments ........................ (402,388) (1,138,823) (926,957)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations (464,252) 7,381,239 8,081,071
Distributions to shareholders from:
Net investment income ............................................. -- (7,809,331) (8,152,085)
Net realized gains ................................................ -- (1,249,416) (184,468)
------------- ------------- -------------
Total distributions to shareholders ................................ -- (9,058,747) (8,336,553)
Capital share transactions (Note 2) ................................ 9,477,723 (16,430,117) (17,695,009)
------------- ------------- -------------
Net increase (decrease) in net assets ......................... 9,013,471 (18,107,625) (17,950,491)
Net assets:
Beginning of year .................................................. -- 111,650,451 129,600,942
------------- ------------- -------------
End of year ........................................................ $ 9,013,471 $ 93,542,826 $ 111,650,451
============= ============= =============
Undistributed net investment income included in net assets:
End of year ........................................................ $ 28,176 $ 6,716,921 $ 7,759,277
============= ============= =============
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
180
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2005 ZERO COUPON FUND - 2010
------------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 4,640,880 $ 4,790,147 $ 4,911,607 $ 4,883,560
Net realized gain from investments ...................... 454,474 1,112,714 2,320,295 1,001,612
Net unrealized appreciation on investments .............. 4,293,862 2,363,992 4,482,254 6,324,375
------------ ------------ ------------ ------------
Net increase in net assets resulting from operations 9,389,216 8,266,853 11,714,156 12,209,547
Distributions to shareholders from:
Net investment income ................................... (4,795,119) (4,939,956) (4,888,749) (4,878,501)
Net realized gains ...................................... (1,109,296) (17,170) (676,395) (39,001)
------------ ------------ ------------ ------------
Total distributions to shareholders ...................... (5,904,415) (4,957,126) (5,565,144) (4,917,502)
Capital share transactions (Note 2) ...................... 3,707,073 (8,617,685) 1,851,397 (593,065)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets ............... 7,191,874 (5,307,958) 8,000,409 6,698,980
Net assets:
Beginning of year ........................................ 77,295,511 82,603,469 85,514,726 78,815,746
------------ ------------ ------------ ------------
End of year .............................................. $ 84,487,385 $ 77,295,511 $ 93,515,135 $ 85,514,726
============ ============ ============ ============
Undistributed net investment income included in net assets:
End of year .............................................. $ 4,635,667 $ 4,789,906 $ 4,906,277 $ 4,883,419
============ ============ ============ ============
</TABLE>
See notes to financial statements.
181
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Valuemark Funds (the Trust) is registered under the Investment Company
Act of 1940, as an open-end investment company, consisting of twenty-five series
(the Funds). All Funds are diversified except the Global Health Care Securities
Fund, the Templeton Global Income Securities Fund and the Value Securities Fund.
Shares of the Funds are sold only to insurance company separate accounts to fund
the benefits of variable life insurance policies or variable annuity contracts
issued by Allianz Life Insurance Company of North America (Allianz Life) and its
affiliates. The Funds and their investment objectives are:
<TABLE>
<CAPTION>
CAPITAL GROWTH GROWTH AND INCOME
- -------------------------------------------------------------------------------------------
<S> <C>
Capital Growth Fund Global Utilities Securities Fund
Global Health Care Securities Fund Growth and Income Fund
Mutual Discovery Securities Fund Income Securities Fund
Natural Resources Securities Fund Mutual Shares Securities Fund
Small Cap Fund Real Estate Securities Fund
Templeton Developing Markets Equity Fund Rising Dividends Fund
Templeton Global Growth Fund Templeton Global Asset Allocation Fund
Templeton International Equity Fund Value Securities Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
</TABLE>
<TABLE>
<CAPTION>
CURRENT INCOME CAPITAL PRESERVATION AND INCOME
- ----------------------------------------------------------------
<S> <C>
High Income Fund Money Market Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
</TABLE>
Effective May 1, 1998, the name of the Utility Equity Fund changed to the Global
Utilities Securities Fund. The portfolio's investment objectives and other
policies did not change.
Effective May 1, 1998, the Global Health Care Securities Fund and the Value
Securities Fund commenced operations.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees (the Board).
Securities in the Money Market Fund are valued at amortized cost which
approximates value.
b. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
182
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. REPURCHASE AGREEMENTS
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balances are deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Funds based on their pro-rata
interests. Certain Funds may enter into repurchase agreements which are
accounted for as a loan by the Funds to the seller, collateralized by securities
which are delivered to the Funds' custodian. The market value, including accrued
interest, of the initial collateralization is required to be at least 102% of
the dollar amount invested by the Funds, with the value of the underlying
securities marked to market daily to maintain coverage of at least 100%. At
December 31, 1998, all outstanding repurchase agreements held by the Funds had
been entered into on that date.
d. FORWARD EXCHANGE CONTRACTS
The Mutual Discovery Securities Fund, the Mutual Shares Securities Fund, the
Templeton Global Asset Allocation Fund and the Templeton Global Income
Securities Fund may enter into forward exchange contracts to hedge against
foreign exchange risks. These contracts are valued daily and the Funds' equity
therein are included in the Statements of Assets and Liabilities. Realized and
unrealized gains and losses are included in the Statements of Operations.
e. OPTIONS
In order to produce incremental income or protect against changes in the value
of the underlying securities, the Mutual Discovery Securities Fund and the
Mutual Shares Securities Fund may write put and covered call options.
Premiums received by the Funds upon writing put or covered call options are
recorded as an asset and an equivalent liability which is subsequently adjusted
daily to equal the current market value of the option written. The Funds will
realize a gain or loss upon the expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option or
the purchase cost for a written put option is adjusted by the amount of the
premium received or paid. The risk in writing a call option is that the Funds
give up the opportunity for profit if the market price of the security increases
and the option is exercised. The risk in writing a put option is that the Funds
may incur a loss if the market price of the security decreases and the option is
exercised. All collateral covering written options are held in a segregated
account by the custodian bank.
f. SECURITIES SOLD SHORT
The Mutual Discovery Securities Fund and the Mutual Shares Securities Fund are
engaged in selling securities short, which obligates the Funds to replace a
security borrowed with the same security at current market value. The Funds
would incur a loss if the price of the security increases between the date of
the short sale and the date on which the Funds replaces the borrowed security.
The Funds would realize a gain if the price of the security declines between
those dates.
The Funds are required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Funds must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
g. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
h. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. For the Money Market Fund,
distributions from net investment income and capital gains or losses are
normally declared daily. Such distributions are reinvested in additional shares
of the Fund.
183
<PAGE>
FRANKLIN VALUEMARK FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
During the year ended December 31, 1998, the Trust offered a single class of
shares, Class 1. Effective January 6, 1999, the Funds (except the Zero Coupon
Fund - 2000, the Zero Coupon Fund - 2005 and the Zero Coupon Fund - 2010) began
offering a new class of shares, Class 2. The shares differ by their distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
At December 31, 1998, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND GLOBAL HEALTH CARE SECURITIES FUND*
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Shares sold ................................... 9,664,745 $140,653,465 1,315,108 $12,754,095
Shares issued in reinvestment of distributions 37,058 539,187 -- --
Shares redeemed ............................... (4,111,363) (58,937,582) (475,618) (4,403,400)
------------------------------------------------------------
Net increase (decrease) ....................... 5,590,440 $ 82,255,070 839,490 $ 8,350,695
------------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 7,609,203 $ 95,467,235
Shares issued in reinvestment of distributions 8,739 109,761
Shares redeemed ............................... (3,398,734) (42,494,827)
Net increase (decrease) ....................... 4,219,208 $ 53,082,169
----------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND
---------------------------------
SHARES AMOUNT
-------------------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold ................................... 2,621,862 $ 52,650,625
Shares issued in reinvestment of distributions 5,388,353 104,426,274
Shares redeemed ............................... (15,318,738) (303,132,530)
----------------------------
Net increase (decrease) ....................... (7,308,523) $(146,055,631)
----------------------------
Year ended December 31, 1997
Shares sold ................................... 1,963,946 $ 36,229,864
Shares issued in reinvestment of distributions 7,553,775 129,547,236
Shares redeemed ............................... (20,093,040) (363,376,229)
---------------------------
Net increase (decrease) ....................... (10,575,319) $(197,599,129)
----------------------------
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND HIGH INCOME FUND
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Shares sold ................................... 9,617,417 $198,201,953 12,350,296 $169,850,148
Shares issued in reinvestment of distributions 7,392,186 146,069,603 3,423,575 46,731,797
Shares redeemed ............................... (15,929,952) (321,695,049) (16,477,344) (226,279,172)
----------------------------------------------------------
Net increase (decrease) ....................... 1,079,651 $ 22,576,507 (703,473) $ (9,697,227)
----------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 11,852,804 $227,366,997 15,001,724 $213,493,612
Shares issued in reinvestment of distributions 4,094,758 76,940,493 2,802,103 38,220,680
Shares redeemed ............................... (13,651,515) (261,056,664) (14,990,766) (212,901,597)
----------------------------------------------------------
Net increase (decrease) ....................... 2,296,047 $ 43,250,826 2,813,061 $ 38,812,695
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INCOME SECURITIES FUND
SHARES AMOUNT
---------------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold .................................. 5,561,398 $ 97,914,458
Shares issued in reinvestment of distributions 7,512,196 127,031,238
Shares redeemed .............................. (19,594,845) (338,128,943)
Net increase (decrease) ...................... (6,521,251) $(113,183,247)
Year ended December 31, 1997
Shares sold .................................. 8,990,147 $157,499,453
Shares issued in reinvestment of distributions 7,246,221 121,011,885
Shares redeemed .............................. (18,135,171) (316,012,124)
Net increase (decrease) ...................... (1,898,803) $(37,500,786)
---------------------------
</TABLE>
184
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
MONEY MARKET FUND SECURITIES FUND
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 748,602,052 $748,602,052 7,041,503 $ 90,113,407
Shares issued in reinvestment of distributions .. 19,603,629 19,603,629 482,835 6,383,083
Shares redeemed ................................. (721,314,062) (721,314,062) (3,946,113) (44,836,285)
---------------------------------------------------------------
Net increase .................................... 46,891,619 $ 46,891,619 3,578,225 $ 51,660,205
---------------------------------------------------------------
Year ended December 31, 1997
Shares sold ..................................... 748,100,457 $748,100,457 17,092,095 $192,828,736
Shares issued in reinvestment of distributions .. 20,721,280 20,721,280 4,419 49,403
Shares redeemed ................................. (810,302,411) (810,302,411) (2,280,587) (26,532,363)
---------------------------------------------------------------
Net increase (decrease) ......................... (41,480,674) $(41,480,674) 14,815,927 $166,345,776
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MUTUAL SHARES
SECURITIES FUND
SHARES AMOUNT
--------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ................................... 12,012,852 $150,206,617
Shares issued in reinvestment of distributions 760,950 9,603,186
Shares redeemed ............................... (4,280,005) (49,418,486)
---------------------------
Net increase .................................. 8,493,797 $110,391,317
---------------------------
Year ended December 31, 1997
Shares sold ................................... 31,512,828 $353,477,935
Shares issued in reinvestment of distributions 7,793 87,831
Shares redeemed ............................... (2,353,072) (27,086,367)
---------------------------
Net increase (decrease) ....................... 29,167,549 $326,479,399
---------------------------
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES REAL ESTATE
SECURITIES FUND SECURITIES FUND
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ................................... 3,505,454 $36,314,081 1,938,333 $ 46,066,967
Shares issued in reinvestment of distributions 91,844 946,913 1,117,322 24,871,599
Shares redeemed ............................... (4,685,716) (47,411,416) (6,098,998) (134,871,059)
---------------------------------------------------------
Net increase (decrease) ....................... (1,088,418) $(10,150,422) (3,043,343)$ (63,932,493)
---------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 3,255,526 $44,002,036 5,979,601 $139,175,365
Shares issued in reinvestment of distributions 107,292 1,423,769 722,405 16,181,889
Shares redeemed ............................... (4,466,321) (59,712,676) (4,062,121) (95,190,817)
---------------------------------------------------------
Net increase (decrease) ....................... (1,103,503) $(14,286,871) 2,639,885 $ 60,166,437
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RISING
DIVIDENDS FUND
-------------------------
SHARES AMOUNT
-------------------------
<S> <C> <C>
Shares sold ................................... 10,051,992 $190,031,986
Shares issued in reinvestment of distributions 6,443,856 113,991,805
Shares redeemed ............................... (14,609,606) (263,398,761)
---------------------------
Net increase (decrease) ....................... 1,886,242 $ 40,625,030
---------------------------
Year ended December 31, 1997
Shares sold ................................... 9,172,221 $162,728,294
Shares issued in reinvestment of distributions 1,563,677 26,957,783
Shares redeemed ............................... (9,887,381) (174,051,905)
---------------------------
Net increase (decrease) ....................... 848,517 $ 15,634,172
---------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
SMALL CAP FUND MARKETS EQUITY FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 10,354,452 $146,238,628 6,171,249 $ 49,413,698
Shares issued in reinvestment of distributions .. 1,866,496 26,056,288 4,042,542 29,793,530
Shares redeemed ................................. (10,047,779) (137,233,030) (13,892,294) (110,288,805)
------------------------------------------------------------
Net increase (decrease) ......................... 2,173,169 $ 35,061,886 (3,678,503 $ (31,081,577)
------------------------------------------------------------
Year ended December 31, 1997 .....................
Shares sold ..................................... 15,767,713 $223,364,294 10,816,139 $ 137,500,694
Shares issued in reinvestment of distributions .. 542,684 7,369,648 774,197 10,312,311
Shares redeemed ................................. (8,440,306) (121,038,611) (7,874,889) (97,008,821)
------------------------------------------------------------
Net increase .................................... 7,870,091 $109,695,331 3,715,447 $ 50,804,184
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON GLOBAL ASSET
ALLOCATION FUND
---------------------------
SHARES AMOUNT
---------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 1,163,365 $15,880,669
Shares issued in reinvestment of distributions .. 556,595 7,168,941
Shares redeemed ................................. (2,081,709) (26,875,808)
--------------------------
Net increase (decrease) ......................... (361,749) $(3,826,198)
--------------------------
Year ended December 31, 1997
Shares sold ..................................... 2,863,159 $38,251,762
Shares issued in reinvestment of distributions .. 149,676 1,995,188
Shares redeemed ................................. (673,877) (9,191,842)
--------------------------
Net increase .................................... 2,338,958 $31,055,108
--------------------------
</TABLE>
185
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON GLOBAL
GLOBAL GROWTH FUND INCOME SECURITIES FUND
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 6,659,421 $103,474,286 884,521 $ 11,354,195
Shares issued in reinvestment of distributions .. 6,496,363 93,807,481 1,004,061 12,370,027
Shares redeemed ................................. (12,002,187) (175,183,507) (4,428,598) (56,677,775)
-----------------------------------------------------------
Net increase (decrease) ......................... 1,153,597 $ 22,098,260 (2,540,016) $(32,953,553)
-----------------------------------------------------------
Year ended December 31, 1997
Shares sold ..................................... 13,313,319 $200,497,392 1,379,330 $18,167,921
Shares issued in reinvestment of distributions .. 971,695 14,760,055 1,145,305 14,522,463
Shares redeemed ................................. (6,882,077) (103,887,590) (4,546,864) (59,593,759)
Net increase (decrease) ......................... 7,402,937 $111,369,857 (2,022,229) $(26,903,375)
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL EQUITY FUND
---------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold .................................... 6,071,020 $ 98,428,488
Shares issued in reinvestment of distributions .. 6,374,245 104,410,134
Shares redeemed ................................. (22,907,488) (363,896,861)
--------------------------------
Net increase (decrease) ......................... (10,462,223) $(161,058,239)
--------------------------------
Year ended December 31, 1997
Shares sold ..................................... 18,290,362 $299,526,246
Shares issued in reinvestment of distributions .. 5,084,879 82,273,337
Shares redeemed ................................. (23,047,242) (378,046,934)
--------------------------------
Net increase (decrease) ......................... 327,999 $3,752,649
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL SMALLER TEMPLETON
COMPANIES FUND PACIFIC GROWTH FUND
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 1,335,385 $13,968,902 12,315,500 $ 91,136,520
Shares issued in reinvestment of distributions .. 147,758 1,600,222 1,116,074 6,941,981
Shares redeemed ................................. (1,687,180) (17,302,839) (18,106,232) (134,829,644)
----------------------------------------------------------------------
Net decrease .................................... (204,037) $(1,733,715) (4,674,658) $(36,751,143)
----------------------------------------------------------------------
Year Ended December 31, 1997
Shares sold ..................................... 2,609,483 $30,517,402 6,602,123 $ 85,539,550
Shares issued in reinvestment of distributions .. 13,269 155,776 396,714 5,815,823
Shares redeemed ................................. (1,145,466) (13,510,710) (13,342,125) (176,454,102)
----------------------------------------------------------------------
Net increase (decrease) ......................... 1,477,286 $17,162,468 (6,343,288) $(85,098,729)
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
SECURITIES FUND
---------------------------
SHARES AMOUNT
---------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 10,470,243 $144,337,382
Shares issued in reinvestment of distributions .. 3,808,590 50,958,932
Shares redeemed ................................. (18,034,303) (250,254,233)
----------------------------
Net decrease .................................... (3,755,470) $(54,957,919)
----------------------------
Year Ended December 31, 1997
Shares sold ..................................... 6,114,131 $ 83,399,898
Shares issued in reinvestment of distributions .. 3,245,331 42,870,826
Shares redeemed ................................. (17,077,659) (231,753,781)
----------------------------
Net increase (decrease) ......................... (7,718,197) $(105,483,057)
----------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE SECURITIES FUND* ZERO COUPON FUND - 2000
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ........................................ 1,367,931 $11,279,710 646,397 $ 9,539,377
Shares issued in reinvestment of distributions -- -- 637,042 9,058,747
Shares redeemed .................................... (211,139) (1,801,987) (2,343,411) (35,028,241)
-------------------------------------------------------------------
Net increase (decrease) ............................ 1,156,792 $ 9,477,723 (1,059,972) $(16,430,117)
-------------------------------------------------------------------
Year ended December 31, 1997
Shares sold ........................................ 510,404 $ 7,615,267
Shares issued in reinvestment of distributions ..... 575,729 8,336,552
Shares redeemed .................................... (2,241,078) (33,646,828)
-----------------------------------
Net decrease ....................................... (1,154,945) $(17,695,009)
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2005
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ........................................ 977,903 $16,942,756
Shares issued in reinvestment of distributions 357,194 5,904,415
Shares redeemed .................................... (1,107,098) (19,140,098)
----------------------------
Net increase (decrease) ............................ 227,999 $ 3,707,073
----------------------------
Year ended December 31, 1997
Shares sold ........................................ 597,716 $ 9,749,533
Shares issued in reinvestment of distributions ..... 315,539 4,957,126
Shares redeemed .................................... (1,431,881) (23,324,344)
----------------------------
Net decrease ....................................... (518,626) $(8,617,685)
----------------------------
</TABLE>
186
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2010
-----------------------
SHARES AMOUNT
-----------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold ..................................... 2,622,702 $48,365,327
Shares issued in reinvestment of distributions .. 314,060 5,565,143
Shares redeemed ................................. (2,825,253) (52,079,073)
--------------------------
Net increase .................................... 111,509 $ 1,851,397
--------------------------
Year ended December 31, 1997
Shares sold ..................................... 1,745,371 $28,766,689
Shares issued in reinvestment of distributions .. 313,017 4,917,502
Shares redeemed ................................. (2,100,095) (34,277,256)
--------------------------
Net decrease .................................... (41,707) $ (593,065)
--------------------------
</TABLE>
*For the period May 1, 1998 (effective date) to December 31, 1998.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
---------------------------------------------------------------------------
<S> <C>
Franklin Templeton Services, Inc. (FT Services) Administrative manager
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Advisory Services, Inc. (Advisory Services) Investment manager
Franklin Mutual Advisers, Inc. (Franklin Mutual) Investment manager
Templeton Asset Management Ltd. (TAML) Investment manager
Templeton Global Advisors Ltd. (TGAL) Investment manager
Templeton Investment Counsel, Inc. (TICI) Investment manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer Agent
</TABLE>
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds, except the Capital Growth Fund, the Global Health Care
Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, the Rising Dividends Fund, the Small Cap Fund, the Templeton
Developing Markets Equity Fund, the Templeton Global Asset Allocation Fund, the
Templeton Global Growth Fund, the Templeton International Equity Fund, the
Templeton International Smaller Companies Fund, the Templeton Pacific Growth
Fund, and the Value Securities Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------
<S> <C>
.625% First $100 million
.50% over $100 million, up to and including $250 million
.45% over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton Global Income Securities Fund and receives fees from Advisers based on
the average daily net assets of the Fund.
The Templeton International Equity Fund and the Templeton Pacific Growth Fund
pay an investment management fee to Advisers based on the average net assets of
the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------
<S> <C>
1.00% First $100 million
.90% over $100 million, up to and including $250 million
.80% over $250 million, up to and including $500 million
</TABLE>
Fees are further reduced on net assets over $500 million.
187
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton International Equity Fund and the Templeton Pacific Growth Fund, and
receives fees from Advisers based on the average daily net assets of each Fund.
The Capital Growth Fund and the Small Cap Fund pay an investment management fee
to Advisers based on the average net assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.75% First $500 million
.625% over $500 million, up to and including $1 billion
.50% over $1 billion
</TABLE>
The Global Health Care Securities Fund and Value Securities Fund pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.60% First $200 million
.50% over $200 million, up to and including $1.3 billion
.40% over $1.3 billion
</TABLE>
The Rising Dividends Fund pays an investment management fee to Advisory Services
based on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
---------------------------------------------
<S> <C>
.75% First $500 million
.625% over $500 million, up to and including $1 billion
.50% over $1 billion
</TABLE>
The Templeton Global Growth Fund pays an investment management fee to TGAL based
on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
1.00% First $100 million
.90% over $100 million, up to and including $250 million
.80% over $250 million, up to and including $500 million
</TABLE>
Fees are further reduced on net assets over $500 million.
The Templeton Global Asset Allocation Fund pays an investment management fee to
TGAL based on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.65% First $200 million
.585% over $200 million, up to and including $1.3 billion
.52% over $1.3 billion
</TABLE>
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton Global Asset Allocation Fund and receives from TGAL fees based on the
average daily net assets of the Fund.
The Templeton International Smaller Companies Fund pays an investment management
fee to TICI based on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.85% First $200 million
.765% over $200 million, up to and including $1.3 billion
.68% over $1.3 billion
</TABLE>
188
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Mutual Discovery Securities Fund and the Mutual Shares Securities Fund pay
an investment management fee to Franklin Mutual of .80% and .60%, respectively,
per year of the average daily net assets of each Fund.
The Templeton Developing Markets Equity Fund pays an investment management fee
to TAML of 1.25% per year of the average daily net assets of the Fund.
Under an agreement with their respective investment managers, FT Services
provides administrative services to the Funds, except for the Global Health Care
Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, the Templeton Global Asset Allocation Fund, the Templeton
International Smaller Companies Fund, and the Value Securities Fund. The fee is
paid by Advisers based on the average daily net assets, and is not an additional
expense of the Funds.
The Global Health Care Securities Fund, the Mutual Discovery Securities Fund,
the Mutual Shares Securities Fund, the Templeton Global Asset Allocation Fund,
the Templeton International Smaller Companies Fund, and the Value Securities
Fund pay administrative fees to FT Services based on the average daily net
assets of each Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.15% First $200 million
.135% over $200 million, up to and including $700 million
.10% over $700 million, up to and including $1.2 billion
</TABLE>
Fees are further reduced on net assets over $1.2 billion.
Advisers agreed in advance to waive the management fees for the Money Market
Fund, the Zero Coupon Fund - 2000, the Zero Coupon Fund - 2005, and the Zero
Coupon Fund - 2010, through December 31, 1998, as noted in the Statements of
Operations.
Distribution plans are included in the management agreements of the Funds. No
payments were made by any Fund as a result of the plans.
Investor Services, under terms of an agreement, performs shareholder servicing
for the Funds and is not paid by the Funds for the services.
4. INCOME TAXES
At December 31, 1998, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE MONEY MUTUAL DISCOVERY MUTUAL SHARES
GROWTH FUND SECURITIES FUND MARKET FUND SECURITIES FUND SECURITIES FUND
---------------------------------------------------------------------------------
Capital loss carryovers expiring in:
<S> <C> <C> <C> <C> <C>
2000 ............................... $ -- $ -- $ 418 $ -- $ --
2001 ............................... -- -- 523 -- --
2002 ............................... -- -- 7,568 -- --
2004 ............................... 52,275 -- -- -- --
2005 ............................... 72,043 -- -- -- --
2006 ............................... 3,304,340 239,954 371 12,201,956 9,766,336
---------------------------------------------------------------------------
$3,428,658 $239,954 $8,880 $12,201,956 $9,766,336
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES
SECURITIES FUND
---------------
<S> <C>
2000 ............................... $ --
2001 ............................... --
2002 ............................... --
2004 ............................... 146,066
2005 ............................... 3,313,053
2006 ............................... 14,821,804
-----------
$18,280,923
-----------
</TABLE>
189
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
DEVELOPING TEMPLETON INTERNATIONAL TEMPLETON
MARKETS GLOBAL INCOME SMALLER PACIFIC
EQUITY FUND SECURITIES FUND COMPANIES FUND GROWTH FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in:
2002 .................................. $ -- $ -- $ -- $ --
2003 .................................. -- 1,035,267 -- --
2005 .................................. -- -- -- --
2006 .................................. 21,632,762 -- 2,543,971 24,460,805
------------------------------------------------------------------
$21,632,762 $1,035,267 $2,543,971 $24,460,805
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT VALUE
SECURITIES FUND SECURITIES FUND
----------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2002 .................................. $11,604,729 $ --
2003 .................................. 826,481 --
2005 .................................. 169,754 --
2006 -- 64,007
---------------------------
$12,600,964 $64,007
---------------------------
</TABLE>
At December 31, 1998, the following Funds had deferred capital losses and/or
deferred currency losses occurring subsequent to October 31, 1998. For tax
purposes, such losses will be reflected in the year ending December 31, 1999.
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
MUTUAL DISCOVERY MUTUAL SHARES NATURAL RESOURCES SMALL CAP DEVELOPING MARKETS GLOBAL ASSET
SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND EQUITY FUND ALLOCATION FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$812,344 $187,467 $5,103,017 $542,078 $7,956,080 $1,267,941
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
GLOBAL INCOME PACIFIC VALUE
SECURITIES FUND GROWTH FUND SECURITIES FUND
- -------------------------------------------------
<S> <C> <C>
$3,913,734 $217,089 $7,486
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions and passive foreign investment company shares.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
At December 31, 1998, the net unrealized appreciation (depreciation) based on
the cost of investments for income tax purposes were as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost .......................... $175,741,424 $8,341,106 $777,543,181 $1,074,294,598 $470,804,786
--------------------------------------------------------------------------------
Unrealized appreciation ...................... 49,774,320 1,091,375 227,578,820 287,053,376 11,535,188
Unrealized depreciation ...................... (4,955,714) (236,878) (29,870,849) (42,162,982) (43,902,212)
--------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ... $ 44,818,606 $ 854,497 $197,707,971 $ 244,890,394 $(32,367,024)
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MUTUAL NATURAL REAL ESTATE
INCOME DISCOVERY MUTUAL SHARES RESOURCES SECURITIES
SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost .......................... $1,091,074,246 $218,469,434 $461,755,822 $ 56,261,477 $263,035,403
---------------------------------------------------------------------------------
Unrealized appreciation ...................... 182,286,142 21,829,765 52,429,218 2,541,006 34,420,668
Unrealized depreciation ...................... (109,573,318) (22,785,541) (33,393,897) (12,756,075) (18,351,064)
---------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ... $ 72,712,824 $ (955,776) $ 19,035,321 $(10,215,069) $ 16,069,604
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
RISING DEVELOPING GLOBAL ASSET TEMPLETON
DIVIDENDS SMALL CAP MARKETS ALLOCATION GLOBAL GROWTH
FUND FUND EQUITY FUND FUND FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ............................... $581,130,657 $307,405,881 $235,244,643 $82,288,215 $697,688,443
---------------------------------------------------------------------------
Unrealized appreciation ........................... 209,282,281 63,912,068 14,946,397 10,184,177 156,671,182
Unrealized depreciation ........................... (37,234,136) (47,651,721) (88,306,086) (11,370,446) (111,111,502)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ........ $172,048,145 $ 16,260,347 $(73,359,689) $(1,186,269) $ 45,559,680
---------------------------------------------------------------------------
</TABLE>
190
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
TEMPLETON U.S.
TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON GOVERNMENT
GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC SECURITIES
SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ............................... $145,477,766 $796,642,373 $28,505,946 $173,769,693 $689,553,989
--------------------------------------------------------------------------
Unrealized appreciation ........................... 5,214,267 284,020,124 3,666,164 4,494,062 30,080,582
Unrealized depreciation ........................... (2,414,175) (121,524,973) (7,190,785) (78,193,879) (891,431)
--------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ........ $ 2,800,092 $162,495,151 $(3,524,621) $(73,699,817) $ 29,189,151
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND - 2000 FUND - 2005 FUND - 2010
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ................................. $9,638,340 $88,607,680 $71,204,140 $73,456,189
--------------------------------------------------------------
Unrealized appreciation ............................. 630,480 4,980,585 13,390,351 20,191,036
Unrealized depreciation ............................. (1,051,415) -- -- --
--------------------------------------------------------------
Net unrealized appreciation (depreciation) .......... $ (420,935) $ 4,980,585 $13,390,351 $20,191,036
--------------------------------------------------------------
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND* SECURITIES FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $83,963,247 $8,350,468 $345,990,937 $345,845,538 $194,867,824
Sales .................................. $14,984,784 $1,538,637 $569,441,686 $420,710,446 $203,682,362
</TABLE>
<TABLE>
<CAPTION>
INCOME MUTUAL DISCOVERY MUTUAL SHARES NATURAL RESOURCES REAL ESTATE
SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $153,409,105 $182,577,184 $393,391,211 $38,212,231 $ 47,342,473
Sales .................................. $273,993,364 $226,345,216 $258,543,897 $47,971,600 $109,718,566
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
DEVELOPING TEMPLETON TEMPLETON
RISING SMALL CAP MARKETS GLOBAL ASSET GLOBAL GROWTH
DIVIDENDS FUND FUND EQUITY FUND ALLOCATION FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $200,557,881 $170,640,706 $ 70,250,809 $44,586,774 $227,707,490
Sales .................................. $266,149,791 $154,234,535 $102,356,111 $45,975,579 $223,605,870
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON U.S.
TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON GOVERNMENT
GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC SECURITIES
SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $134,227,237 $ 54,558,359 $5,279,351 $14,613,597 $224,436,050
Sales .................................. $170,505,788 $130,992,436 $6,714,347 $51,871,766 $291,443,353
</TABLE>
<TABLE>
<CAPTION>
VALUE ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND - 2000 FUND - 2005 FUND - 2010
------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ............................................. $9,461,629 $17,945,900 $3,063,330 $13,934,098
Sales ................................................. $1,003,722 $44,461,447 $5,908,354 $17,745,411
</TABLE>
*For the period May 1, 1998 (effective date) to December 31, 1998.
191
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS (CONT.)
Transactions in call options written during the period ended December 31, 1998
were as follows:
MUTUAL DISCOVERY SECURITIES FUND
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
------------------------
<S> <C> <C>
Options outstanding at December 31, 1997 . -- $ --
Options written .......................... 9 1,346
Options expired .......................... -- --
Options closed ........................... -- --
Options exercised ........................ -- --
------------------------
Options outstanding at December 31, 1998 . 9 $1,346
------------------------
</TABLE>
MUTUAL SHARES SECURITIES FUND
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
----------------------
<S> <C> <C>
Options outstanding at December 31, 1997 . -- $ --
Options written ........................... 12 1,795
Options expired ........................... -- --
Options closed ............................ -- --
Options exercised ......................... -- --
----------------------
Options outstanding at December 31, 1998 .. 12 $1,795
----------------------
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Each of the Funds listed below has been a party to financial instruments with
off-balance-sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Funds from adverse changes in the relationship
between the U.S. dollar and foreign currencies and interest rates. These
instruments involve market risk in excess of the amount recognized on the
Statements of Assets and Liabilities. Some of these risks have been minimized by
offsetting contracts. Risks arise from the possible inability of counterparties
to meet the terms of their contracts, future movement in currency values and
interest rates and contract positions that are not exact offsets. The contract
amount indicates the extent of the Funds' involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At December
31, 1998, the Funds have outstanding forward exchange contracts for the sale or
purchase of currencies as set out below. The contracts are reported in the
financial statements at the Funds' net equity, as measured by the difference
between the forward exchange rates at the reporting date and the forward
exchange rates at the day of entry into the contract.
MUTUAL DISCOVERY SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,001,767 British Pound ......................................... U.S.$ 6,658,941 5/20/99 U.S.$ 21,361
858,070 British Pound ......................................... 1,452,632 1/20/99 25,994
181,897 Canadian Dollar ....................................... 123,354 1/13/99 4,927
24,031,159 Danish Krone .......................................... 3,869,752 4/27/99 81,887
4,650,080 Dutch Guilder ......................................... 2,500,043 3/17/99 12,930
15,741,776 French Franc .......................................... 2,863,066 1/19/99 42,350
12,354,985 French Franc .......................................... 2,218,130 2/11/99 1,791
1,998,595,445 Italian Lira .......................................... 1,235,865 4/02/99 18,272
2,277,014 New Zealand Dollar .................................... 1,225,512 2/17/99 21,887
906,057 Norwegian Krone ....................................... 122,000 3/10/99 3,784
121,171,307 Spanish Peseta ........................................ 879,327 1/19/99 23,345
65,092,418 Swedish Krona ......................................... 8,354,822 3/18/99 296,835
29,738,334 Swedish Krona ......................................... 3,696,451 2/17/99 19,987
17,022,073 Swedish Krona ......................................... 2,185,314 4/19/99 75,032
8,592,405 Swedish Krona ......................................... 1,072,549 3/15/99 9,027
1,065,217 Swedish Krona ......................................... 136,847 1/21/99 5,309
6,142,559 Swiss Franc ........................................... 4,534,929 3/10/99 31,253
--------- ------
U.S.$43,129,534 U.S.$ 695,971
----------- -------------
</TABLE>
192
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
MUTUAL DISCOVERY SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,424,115 British Pound .................................. U.S. $ 2,344,275 1/20/99 U.S. $ 23,476
7,389,580 Canadian Dollar ................................ 4,776,317 1/13/99 34,757
793,945 Danish Krone ................................... 124,560 4/27/99 584
23,937,428 French Franc ................................... 4,279,661 1/19/99 9,607
4,637,703,355 Italian Lira ................................... 2,746,160 4/02/99 79,241
300,000 New Zealand Dollar ............................. 156,201 2/17/99 2,378
----------- -----------
U.S. $14,427,174 U.S. $ 150,043
----------- -----------
Unrealized gain on forward foreign currency contracts ............. U.S. $ 846,014
-----------
CONTRACTS TO SELL
- -------------------------------------------------------------------
2,118,309 Australian Dollar .............................. U.S. $ 1,259,589 1/06/99 U.S. $ (39,761)
118,478,225 Belgian Franc .................................. 3,425,049 1/12/99 (23,934)
14,779,941 British Pound .................................. 23,973,064 1/20/99 (600,236)
7,852,937 Canadian Dollar ................................ 5,094,940 1/13/99 (17,808)
4,767,834 Dutch Guilder .................................. 2,537,229 2/10/99 (8,527)
10,330,365 Finnish Markka ................................. 2,025,165 2/03/99 (18,536)
44,708,803 French Franc ................................... 7,840,899 1/27/99 (173,605)
22,664,983 French Franc ................................... 3,792,668 1/19/99 (268,595)
16,200,879,697 Italian Lira ................................... 9,327,150 4/02/99 (542,744)
194,232,686 Japanese Yen ................................... 1,694,013 3/23/99 (46,964)
16,583,945 Norwegian Krone ................................ 2,119,950 3/10/99 (43,813)
64,324,619 Portugese Escudo ............................... 374,766 3/17/99 (3,407)
----------- -----------
U.S. $63,464,482 U.S. $(1,787,930)
----------- -----------
CONTRACTS TO BUY
- -------------------------------------------------------------------
1,572,608 Australian Dollar .............................. U.S. $ 995,292 1/06/99 U.S. $ (30,670)
871,138 British Pound .................................. 1,459,475 1/20/99 (11,112)
379,465 British Pound .................................. 634,769 5/20/99 (5,365)
7,723,500 Danish Krone ................................... 1,220,429 4/27/99 (3,027)
10,403,550 Norwegian Krone ................................ 1,368,345 3/10/99 (10,959)
----------- -----------
U.S. $ 5,678,310 U.S. $ (61,133)
----------- -----------
Unrealized loss on forward foreign currency contracts ............. (1,849,063)
----------
Net unrealized loss on forward foreign currency contracts ... U.S. $(1,003,049)
-----------
</TABLE>
MUTUAL SHARES SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,628,544 British Pound .................................. U.S. $ 7,701,897 5/20/99 U.S. $ 24,707
271,399 British Pound .................................. 452,951 6/18/99 2,924
265,000 British Pound .................................. 442,020 1/20/99 1,428
13,367,244 Canadian Dollar ................................ 8,882,775 1/29/99 179,540
5,190,062 Dutch Guilder .................................. 2,790,356 3/17/99 14,432
32,069,148 French Franc ................................... 5,757,477 2/11/99 4,650
21,552,387 French Franc ................................... 3,867,963 1/19/99 6,063
2,203,476 French Franc ................................... 399,260 2/26/99 3,705
995,378,319 Italian Lira ................................... 611,770 4/02/99 5,362
18,005,166 Spanish Peseta ................................. 127,551 1/19/99 359
34,047,868 Swedish Krona .................................. 4,250,033 3/15/99 35,771
31,199,959 Swedish Krona .................................. 4,004,615 3/18/99 142,278
22,259,585 Swedish Krona .................................. 2,882,439 4/19/99 122,845
11,000,000 Swedish Krona .................................. 1,364,697 2/17/99 4,798
3,330,461 Swiss Franc .................................... 2,455,187 3/10/99 13,319
----------- --------
U.S. $45,990,991 U.S. $562,181
----------- --------
</TABLE>
193
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
MUTUAL SHARES SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,200,000 British Pound ..................................... U.S. $ 1,980,060 5/20/99 U.S. $ 10,335
232,983 British Pound ..................................... 380,927 1/20/99 6,433
8,771,175 Canadian Dollar ................................... 5,672,981 1/29/99 37,818
6,984,525 Finnish Markka .................................... 1,379,109 2/03/99 2,670
1,889,660,721 Italian Lira ...................................... 1,062,683 4/02/99 88,544
----------- ---------
U.S. $10,475,760 U.S. $145,800
----------- ---------
Net unrealized gain on offsetting forward foreign currency contracts . 50,154
---------
Unrealized gain on forward foreign currency contracts ............. U.S. $758,135
---------
CONTRACTS TO SELL
- ----------------------------------------------------------------------
8,948,435 British Pound ..................................... U.S. $14,514,361 1/20/99 U.S. $(363,412)
1,343,045 Dutch Guilder ..................................... 714,709 2/10/99 (2,402)
16,683,518 Finnish Markka .................................... 3,270,637 2/03/99 (29,936)
10,686,679 French Franc ...................................... 1,788,266 1/19/99 (126,644)
5,114,831 French Franc ...................................... 897,024 1/27/99 (19,861)
7,048,009,404 Italian Lira ...................................... 4,064,062 4/02/99 (229,722)
----------- ---------
U.S. $25,249,059 U.S. $(771,977)
----------- ---------
CONTRACTS TO BUY
- ----------------------------------------------------------------------
750,000 British Pound ..................................... U.S. $ 1,245,413 5/20/99 U.S. $ (1,416)
229,946 British Pound ..................................... 385,570 1/20/99 (3,258)
968,788 Finnish Markka .................................... 192,986 2/03/99 (1,326)
----------- ---------
U.S. $ 1,823,969 U.S. $ (6,000)
----------- ---------
Net unrealized loss on offsetting forward foreign currency contracts . (26,620)
---------
Unrealized loss on forward foreign currency contracts ............. (804,597)
---------
Net unrealized loss on forward foreign currency contracts ...... U.S. $ (46,462)
---------
</TABLE>
TEMPLETON GLOBAL ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
125,000 British Pound ................................... U.S. $209,250 1/29/99 U.S. $ 1,481
CONTRACTS TO SELL
- --------------------------------------------------------------------
225,000 British Pound ................................... U.S. $371,700 1/25/99 U.S. $ (2,317)
----------
Net unrealized loss on forward foreign currency contracts .... U.S. $ (836)
----------
</TABLE>
TEMPLETON GLOBAL INCOME SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
900,000 British Pound ................................... U.S. $1,506,600 01/29/99 U.S. $10,712
CONTRACTS TO SELL
- --------------------------------------------------------------------
1,825,000 British Pound ................................... U.S. $3,014,900 01/25/99 U.S. $(18,845)
--------
Net unrealized loss on forward foreign currency contracts .... U.S. $ (8,133)
--------
</TABLE>
194
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
7. CREDIT RISK AND DEFAULTED SECURITIES
The High Income Fund and the Income Securities Fund have 94.9% and 29.5%,
respectively, of their portfolios invested in lower rated and comparable quality
unrated high yield securities, which tend to be more sensitive to economic
conditions than higher rated securities. The risk of loss due to default by the
issuer may be significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer. At December 31, 1998 the High Income Fund held
defaulted securities with a value aggregating $1,925,625 representing .4% of the
Fund's net assets. For information as to specific securities, see the
accompanying Statement of Investments.
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide an estimate for losses on interest receivable.
The High Income Fund has investments in excess of 10% of its total net assets in
the Consumer Services and Telecommunications industries. Such concentration may
subject the Fund more significantly to economic changes occurring within that
industry.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at December 31,1998 are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNTS/SHARES ISSUER ACQUISITION DATE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GLOBAL UTILITIES SECURITIES FUND
$ 175,000 CMS Energy Corp., 7.75%, cvt. pfd. (1.05% of Net Assets) .... 6/18/97 $8,750,000 $10,325,000
-----------
HIGH INCOME FUND
$7,800,000 International Wireless Communications, senior disc.
note, 8/15/01 (.15% of Net Assets) .......................... 8/09/96 $3,965,050 $ 682,500
-----------
INCOME SECURITIES FUND
$ 160,000 CMS Energy Corp., 7.75%, cvt. pfd. (.80% of Net Assets) ..... 6/18/97 $8,000,000 $ 9,440,000
-----------
MUTUAL DISCOVERY SECURITIES FUND
615 Golden Ocean Group Ltd., wts., 8/31/01 ...................... 8/25/97 $ 375 $ --
94,000 Laser Mortgage Management, Inc. ............................. 11/26/97 1,410,000 511,125
11,745 Security Capital European Realty ............................ 4/08/98 234,900 234,900
-----------
Total Restricted Securities (.33% of Net Assets) .......................... $ 746,725
-----------
MUTUAL SHARES SECURITIES FUND
1,120 Golden Ocean Group Ltd., wts., 8/31/01 ...................... 8/25/97 $ 1,611 $ --
215,000 Laser Mortgage Management Inc. .............................. 11/26/97 3,225,000 1,169,062
23,055 Security Capital European Realty ............................ 11/02/98 461,100 461,100
-----------
Total Restricted Securities (.34% of Net Assets) .......................... $ 1,630,162
-----------
REAL ESTATE SECURITIES FUND
866,067 Pacific Retail Trust (3.28% of Net Assets) .................. 8/30/96-4/30/97 $9,791,134 $ 9,249,595
-----------
</TABLE>
195
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies", at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES HELD AT GROSS GROSS SHARES HELD AT VALUE AT DIVIDEND
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD END OF PERIOD INCOME
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE SECURITIES FUND
Candlewood Hotel Co. Inc. ..... 650,000 -- -- 650,000 $ 3,412,500 None
RISING DIVIDENDS FUND
West Co. Inc. ................. 172,900 611,400 -- 784,300 $27,989,706 $255,193
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Small Cap Fund loans securities to certain brokers for which it receives
cash collateral against the loaned securities in an amount equal to at least
102% of the market value of the loaned securities. Net interest income from the
investment of the cash collateral received was $298,185 for the period ended
December 31, 1998. The value of the loaned securities was $7,875,252 at December
31, 1998.
11. OTHER CONSIDERATIONS
Advisers, as the High Income Fund and the Income Securities Fund manager, may
serve as a member of various credit committees, representing credit interests in
certain corporate restructuring negotiations. Currently, Advisers serves on the
credit committees for International Wireless Communications. As a result of this
involvement, Advisers may be in possession of certain material non-public
information. Advisers has not nor does it intend to sell any of its holdings in
these securities while in possession of this information.
196
<PAGE>
FRANKLIN VALUEMARK FUNDS
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FRANKLIN VALUEMARK FUNDS
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds constituting the
Franklin Valuemark Funds, (hereafter referred to as the "Fund") at December 31,
1998, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period then
ended and each of their financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
February 4, 1999
197
<PAGE>
FRANKLIN VALUEMARK FUNDS
Tax Information
Under Section 852(b)(3)C) of the Internal Revenue Code, the Funds hereby
designate the following amounts as capital gain dividends for the fiscal year
ended December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL GAINS
20% RATE GAIN
-------------
<S> <C>
Global Utilities Securities Fund .............. $ 73,661,402
Growth and Income Fund Fund ................... 115,134,923
High Income Fund .............................. 11,999,469
Income Securities Fund ........................ 28,954,072
Real Estate Securities Fund ................... 23,903,974
Rising Dividends Fund ......................... 85,244,094
Small Cap Fund ................................ 220,650
Templeton Global Asset Allocation Fund ........ 4,579,385
Templeton Global Growth Fund .................. 72,351,509
Templeton International Equity Fund ........... 22,477,825
Zero Coupon Funds - 2000 ...................... 1,717,748
Zero Coupon Funds - 2005 ...................... 454,474
Zero Coupon Funds - 2010 ...................... 1,744,159
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the following percentage amounts of the ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
HIGH INCOME
CAPITAL GROWTH AND GLOBAL UTILITIES INCOME SECURITIES MUTUAL DISCOVERY
GROWTH FUND INCOME FUND SECURITIES FUND FUND FUND SECURITIES FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100.00% 50.69% 50.82% .55% 25.21% 14.35%
</TABLE>
<TABLE>
<CAPTION>
NATURAL RISING
MUTUAL SHARES RESOURCES REAL ESTATE DIVIDENDS
SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND
- ------------------------------------------------------------------
<S> <C> <C> <C>
70.47% 30.19% 14.07% 60.34%
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
SMALL CAP GLOBAL ASSET GLOBAL
FUND ALLOCATION FUND GROWTH FUND
- -------------------------------------------
<S> <C> <C>
5.86% 3.43% 9.22%
</TABLE>
198
<PAGE>
FVF *A98
SUPPLEMENT DATED JANUARY 15, 1999
TO THE PROSPECTUSES DATED MAY 1, 1998
OF
FRANKLIN(R) VALUEMARK(R) II, III & IV
FLEXIBLE PAYMENT VARIABLE ANNUITIES
ALLIANZ LIFE VARIABLE ACCOUNT B AND
PREFERRED LIFE VARIABLE ACCOUNT C
I. YEAR 2000 Allianz Life and Preferred Life have initiated programs to ensure
that all of the computer systems utilized to provide services and administer
policies will function properly in the year 2000. An assessment of the total
expected costs specifically related to the year 2000 conversion has been
completed; the total amounts to be expensed over the next two years are not
expected to have a significant effect on either Allianz Life's or Preferred
Life's financial position or results of operations. Allianz Life and Preferred
Life believe they have taken steps that are reasonably designed to address the
potential failure of computer systems used by their service providers and to
ensure their year 2000 program is completed on a timely basis.
II. The shares of Franklin Valuemark Funds, in which the Contracts invest, have
been renamed as Class 1 shares. No other changes were made to the Class 1
shares.
III. The following changes are made to the sections entitled "Trust Annual
Expenses" or "Franklin Valuemark Funds' Annual Expenses" in the prospectus:
a) The following chart restates information about certain Portfolios, as
indicated below:
<TABLE>
<CAPTION>
MANAGEMENT TOTAL
AND PORTFOLIO OTHER ANNUAL
PORTFOLIO ADMINISTRATION FEES EXPENSES EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon Fund - 2000(5) ..... .60% .03% .63%
Zero Coupon Fund - 2005(5) ..... .62% .03% .65%
Zero Coupon Fund - 2010(5) ..... .62% .03% .65%
</TABLE>
b) The footnotes are restated as follows:
(4)For the year ended December 31, 1997, Franklin Advisers, Inc. ("Advisers")
agreed in advance to waive a portion of its management fees and, if
necessary, to pay certain expenses of the Fund. With this reduction,
management fees and total annual expenses, including management and portfolio
administration fees, paid by the Portfolio represented .43% and .45% of the
Portfolio's average net assets, respectively. The voluntary expense reduction
was discontinued by Advisers effective January 1, 1999.
(5)For the year ended December 31, 1997, Advisers agreed in advance to waive
a portion of its management fees and, if necessary, to pay certain expenses
of the Fund. With this reduction, management fees and total annual expenses,
including management and portfolio administration fees, represented .37% and
.40% of each Portfolio's average net assets, respectively. The voluntary
expense reduction was discontinued by Advisers effective January 1, 1999.
c) The Examples for certain Portfolios are restated, as indicated below:
FRANKLIN VALUEMARK II EXAMPLES
If the Contract is fully surrendered at the end of the applicable time period
and no prior surrenders have occurred, the Contract Owner would have incurred
the following expenses on a $1,000 investment, assuming a 5% rate of return
on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 64 $ 89 $118 $246
Zero Coupon Fund - 2005 ... $ 64 $ 89 $119 $248
Zero Coupon Fund - 2010 ... $ 64 $ 89 $119 $248
</TABLE>
If the Contract is not surrendered at the end of the applicable time period
and no prior surrenders have occurred or is annuitized, the Contract Owner
would have incurred the following expenses on a $1,000 investment, assuming a
5% annual return on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 22 $ 67 $114 $246
Zero Coupon Fund - 2005 ... $ 22 $ 67 $115 $248
Zero Coupon Fund - 2010 ... $ 22 $ 67 $115 $248
</TABLE>
199
<PAGE>
FRANKLIN VALUEMARK III EXAMPLES
If the Contract is fully surrendered at the end of the applicable time period
and no prior surrenders have occurred, the Contract Owner would have incurred
the following expenses on a $1,000 investment, assuming a 5% rate of return
on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 73 $ 89 $118 $246
Zero Coupon Fund - 2005 ... $ 73 $ 89 $118 $248
Zero Coupon Fund - 2010 ... $ 73 $ 89 $118 $248
</TABLE>
If the Contract is not surrendered at the end of the applicable time period
and no prior surrenders have occurred or is annuitized, the Contract Owner
would have incurred the following expenses on a $1,000 investment, assuming a
5% annual return on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 22 $ 67 $114 $246
Zero Coupon Fund - 2005 ... $ 22 $ 67 $115 $248
Zero Coupon Fund - 2010 ... $ 22 $ 67 $115 $248
</TABLE>
FRANKLIN VALUEMARK IV EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if you surrender your contract at the end of each
time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 83 $120 $153 $255
Zero Coupon Fund - 2005 ... $ 83 $121 $154 $257
Zero Coupon Fund - 2010 ... $ 83 $121 $154 $257
</TABLE>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money, if your Contract is not surrendered or is
annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 23 $ 69 $119 $255
Zero Coupon Fund - 2005 ... $ 23 $ 70 $120 $257
Zero Coupon Fund - 2010 ... $ 23 $ 70 $120 $257
</TABLE>
200
<PAGE>
SUPPLEMENT DATED JANUARY 15, 1999
TO THE PROSPECTUS DATED MAY 1, 1998
OF
FRANKLIN(R) VALUEMARK(R) FUNDS
CLASS 1 SHARES
I. Beginning December 28, 1998, the Trust has two classes of shares: Class 1 and
Class 2. All previously issued shares have been renamed Class 1 shares, and no
other changes have been made to Class 1 shares. This prospectus offers only
Class 1 shares.
II. The section "General Information" is amended by:
a) Changing the title "Voting Privileges and Other Rights" to "Trust
Organization, Voting Privileges and Rights" and substituting paragraph one
with the following discussion:
The Trust is an open-end management investment company, commonly called a
mutual fund. It was organized as a Massachusetts business trust and is
registered with the SEC. The Trust currently offers two classes of shares of
each Portfolio: Class 1 and Class 2. All shares purchased before the initial
offering of Class 2 shares of a Portfolio on December 28, 1998 are considered
Class 1 shares. After that date, all shares will be designated either Class 1
or Class 2. Class 2 shares have a Rule 12b-1 distribution plan and are
currently subject to fees of .30% per year of Class 2's average daily net
assets which will affect the performance of Class 2 shares. Class 1 shares do
not bear any Rule 12b-1 fees. Additional series and classes of shares may be
offered in the future.
III. The section "Management" is amended by:
a) Under "Managers - Manager Services and Fees," adding the following footnote
to the expense information table:
Effective January 1, 1999, Advisers has discontinued its voluntary fee
waivers for the Money Fund, Zero Coupon Fund - 2000, Zero Coupon Fund - 2005,
Zero Coupon Fund - 2010.
b) Under "Portfolio Operations," replacing the information for the portfolios
listed below with the following, and deleting the biographical information
which is no longer relevant:
Templeton Global Asset Allocation Fund
The Portfolio is managed by:
Dale Winner
Jeffrey Everett
Sean Farrington
Beginning January 1, 1999, the Portfolio's investments in debt obligations
are managed by a team of Templeton Global Bond Managers, a division of
Templeton Investment Counsel, Inc.
Templeton Global Income Securities Fund
Beginning January 1, 1999, the Portfolio is managed by a team of Templeton
Global Bond Managers, a division of Templeton Investment Counsel, Inc.
Please note that certain of the Portfolios discussed in the Trust Prospectus may
not be currently available in connection with a Contract. You should refer to
the prospectus of the specific insurance product that accompanies the Trust
prospectus.
201
<PAGE>
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<PAGE>
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<PAGE>
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PART C
ITEM 15. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to Trustees, officers and
controlling persons of the Fund, pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment
by the Fund of expenses incurred or paid by a Trustee, officer or controlling
person of the Fund in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court or appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
1. ARTICLES OF INCORPORATION.
(i) Agreement and Declaration of Trust, dated April 20, 1988,
incorporated by reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust, dated October 21, 1988, incorporated by reference to
Post-Effective Amendment No. 16 to Registration Statement on Form
N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii)Certificate of Amendment of Agreement and Declaration of
Trust, dated October 16, 1998, incorporated by reference to
Post-Effective Amendment No. 26 to Registration Statement on
Form N-1A
File No. 33-23493
Filing Date: November 30, 1998
2. BYLAWS.
(i) Bylaws of Registrant, dated April 20, 1988, incorporated by
reference to Post-Effective No. 16 to Registration Statement on
Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii)Certificate of Amendment to Bylaws, dated May 16, 1995,
incorporated by reference to Post-Effective No. 16 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
3. VOTING TRUST AGREEMENTS.
Not Applicable
4. AGREEMENT OF ACQUISITION OR REORGANIZATION.
(i) Form of Agreement and Plan of Reorganization by and between the
Templeton Variable Products Series Fund and the Registrant, filed
herewith as Exhibit 1 to the Combined Proxy Statement/Prospectus
included as Part A of this Registration Statement.
Registration Statement on Form N-14
File No. 33-23493
Filing Date: November 3, 1999
5. INSTRUMENTS DEFINE RIGHTS OF SECURITY HOLDERS
Not Applicable
6. INVESTMENTS ADVISORY CONTRACTS.
(i) Management Agreement, incorporated by reference to Post-Effective
No. 16 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Addendum to Investment Management Agreement, incorporated by
reference to Post-Effective No. 16 to Registration Statement on
Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement with respect to Templeton International Equity
Fund, incorporated by reference to Post-Effective No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Subadvisory Agreement with respect to Templeton International
Equity Fund, incorporated by reference to Post-Effective No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Form of proposed Management Agreement with respect to Templeton
International Equity Fund, filed herewith as Exhibit III to the
Combined Proxy Statement/Prospectus included as Part A of this
Registration Statement
File No. 33-23493
Filing Date: August 19, 1995
(vi) Investment Management Agreement with respect to Templeton
Global Growth Fund, incorporated by reference to Post-Effective No.
16 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vii)Subadvisory Agreement with respect to Global Income Securities
Fund, incorporated by reference to Post-Effective No. 16
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii)Investment Management Agreement with respect to Templeton
Global Asset Allocation Fund, incorporated by reference to
Post-Effective No. 16 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ix) Subadvisory Agreement with respect to Templeton Global Asset
Allocation Fund, incorporated by reference to Post-Effective No.16
to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Form of proposed Management Agreement with respect to Templeton
Global Asset Allocation Fund, filed herewith as Exhibit II to the
Combined Proxy Statement/Prospectus included as Part A of this
Registration Statement
File No. 33-23493
(xi) Management Agreement with respect to Franklin Small Cap Fund,
incorporated by reference to Post-Effective No. 20 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xii)Investment Management Agreement with respect to Templeton
Developing Markets Equity Fund, incorporated by reference to
Post-Effective No. 17 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xiii)Form of proposed Management Agreement with respect to
Templeton Developing Markets Equity Fund, filed herewith as Exhibit
IV to the Combined Proxy Statement/Prospectus included as Part A of
this Registration Statement
File No. 33-23493
(xiv)Amendment to Investment Management Agreement with respect to
Templeton Developing Markets Equity Fund, incorporated by reference
to Post-Effective No. 23 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: February 12, 1998
(xv)Addendum to Investment Management Agreement with respect Templeton
Developing Markets Equity Fund, incorporated by reference to
Post-Effective No. 24 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 30, 1998
(xvi)Management Agreement with respect to Capital Growth Fund,
incorporated by reference to Post-Effective No. 18 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xvii)Amendment to Management Agreement with respect to Capital
Growth Fund, incorporated by reference to Post-Effective No. 20 to
Registration Statement on Form N-1A
File No. 33-23493,
Filing Date: August 30, 1996
(xviii)Management Agreement with respect to Mutual Shares Securities
Fund, incorporated by reference to Post-Effective No. 22 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xix)Form of Investment Management Agreement with respect to Franklin
S&P Index Fund, filed with registration statement on form N-14
File No. 33-23493
Filing Dated: November 3, 1999
(xx) Form of Investment Management Agreement with respect to Franklin
Strategic Income Securities Fund, filed with registration statement
on form N-14
File No. 33-23493
Filing Dated: November 3, 1999
7. UNDERWRITING CONTRACTS.
(i) Distribution Agreement between the Registrant and
Franklin/Templeton Distributors, Inc., dated September 24, 1998,
incorporated by reference Post-Effective No. 26 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: November 30, 1998
8. BONUS OR PROFIT SHARING CONTRACTS.
Not Applicable
9. CUSTODIAN AGREEMENTS.
(i) Foreign Exchange Netting Agreement with respect to the
International Equity Fund, incorporated by reference to
Post-Effective No. 16 Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Custody Agreement with respect to the Templeton Developing Equity
Fund and the Templeton Global Growth Fund, incorporated by
reference to Post-Effective No. 16 to Registration Statement on
Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Master Custody Agreement, incorporated by reference to
Post-Effective Amendment No.19 to Registration Statement on Form
N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Terminal Link Agreement, incorporated by reference to
Post-Effective No. 19 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(v) Amendment to Global Custody Agreement, incorporated by reference
to Post-Effective No. 23 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vi) Amendment to Master Custody, incorporated by reference to
Post-Effective No. 23 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vii) Letter Agreement, incorporated by reference to Post-Effective
No. 19 to Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(viii) Custody Agreement with respect to Mutual Shares Securities
Fund, incorporated by reference to Post-Effective No. 23 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
10. RULE 12b-1 PLAN.
(i) Class 2 Plan of Distribution pursuant to Rule 12b-1, incorporated
by reference to Post-Effective No. 26 to Registration Statement on
Form N-1A
File No. 33-23493
Filing Date: November 30, 1998
(ii) Multiple Class Plan pursuant to Rule 18f-3 for all series of
the Registrant, incorporated by reference to Post-Effective No. 26
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: November 30, 1998
11. LEGAL OPINION.
(i) Legal Opinion, Securities Act of 1933, dated February 5, 1999
Filing: Post-Effective No. 27 to Registration Statement on Form
N-1A
File No. 33-23493
Filing Date: February 25, 1999
(ii)Consent to Use of Opinion, dated December 8, 1999
12. OPINION REGARDING TAX MATTERS.
(i) Form of Opinion of Jorden Burt Boros Cicchetti Berenson & Johnson
LLP regarding tax matters and consequences.
13. OTHER MATERIAL CONTRACTS.
Not Applicable
14. OTHER OPINIONS.
(i) Consent of Independent Auditors with respect to Registrant.
(ii) Consent of Independent Auditors with respect to Templeton Variable
Products Series Trust.
15. OMITTED FINANCIAL STATEMENTS.
Not Applicable
16. POWER OF ATTORNEY.
(i)
17. OTHER EXHIBITS
(i) Form of Voting Instruction Card filed with Registration Statement
on Form N-14
File No. 33-23493
Filing Dated: November 3, 1999
ITEM 17. UNDERTAKINGS
The undersigned Registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145 of the Securities Act of 1933 (the
"1933 Act"), the reoffering prospectus will contain the information called
for by the applicable form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the items of the
applicable form.
The undersigned Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as part of an amendment to the Registration
Statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of San Mateo, and the
State of California, on the 17th day of December, 1999.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
By /S/ CHARLES E. JOHNSON*
Charles E. Johnson, Principal Executive
Officer and Trustee
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities on the dates indicated.
CHARLES E. JOHNSON* Principal Executive Officer and Trustee
Charles E. Johnson Dated: December 17, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: December 17, 1999
Principal Accounting Officer
Kimberley H. Monasterio Dated:
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: December 17, 1999
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: December 17, 1999
EDWARD J. BONACH Trustee
Edward J. Bonach Dated: December 17, 1999
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: December 17, 1999
ROBERT F. CARLSON* Trustee
Robert F. Carlson Dated: December 17, 1999
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: December 17, 1999
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: December 17, 1999
FRANK W. T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: December 17, 1999
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: December 17, 1999
/s/ Karen L. Skidmore
* By KAREN L. SKIDMORE, ATTORNEY-IN-FACT
(Pursuant to Power of Attorney attached)
December 8, 1999
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
Re: CONSENT TO USE OF OPINION
Ladies and Gentlemen:
We hereby consent to the incorporation by reference of our legal
opinion dated February 5, 1999, relating to the legality of the issuance of
the Trust's shares into the Trust's Registration Statement on Form N-14,
filed on November 3, 1999, or any amendments thereto (the "N-14 Registration
Statement"), which legal opinion was previously filed on February 25, 1999,
with the SEC via EDGAR with Post-Effective Amendment No. 27 to the Trust's
Registration Statement on Form N-1A, and we further consent to reference in
the N-14 Registration Statement to the fact that the opinion concerning the
legality of the issuance of the shares has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: /S/ MARK H. PLAFKER
Mark H. Plafker, Partner
MHP/rae
266792
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Franklin Templeton Variable Insurance Products Trust on Form N-14 of our
report dated February 4, 1999 on our audit of the Franklin Valuemark Funds,
now referred to therein as Franklin Templeton Variable Insurance Products
Trust, including each fund's financial statements and financial highlights,
which report is included in the Annual Report to Shareholders for the year
ended December 31, 1998 which is included in the Registration Statement.
/s/PricewaterhouseCoopers LLP
San Francisco, California
December 16, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports dated January 28, 1999 on the financial
statements of Franklin Large Cap Growth Investments Fund (formerly Franklin
Growth Investments Fund), Franklin Small Cap Investments Fund, Mutual Shares
Investments Fund, Templeton Asset Allocation Fund, Templeton Bond Fund,
Templeton Developing Markets Fund, Templeton International Fund and Templeton
Stock Fund, series of Templeton Variable Products Series Fund, which appear
in the 1998 Annual Reports to Shareholders and which are incorporated herein
by reference in the Registration Statement on Form N-14 of the Franklin
Templeton Variable Insurance Products Trust as filed with the Securities and
Exchange Commission.
/s/ MCGLADREY & PULLEN, LLP
New York, New York
December 16, 1999
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST (the "Registrant") hereby appoint MARK H. PLAFKER,
HARMON E. BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LEIANN NUZUM (with
full power to each of them to act alone) his/her attorney-in-fact and agent,
in all capacities, to execute, deliver and file in the names of the
undersigned, any and all instruments that said attorneys and agents may deem
necessary or advisable to enable the Registrant to comply with or register
any security issued by the Registrant under the Securities act of 1933, as
amended, included but not limited to, any registration statements, including
any and all pre- and post-effective amendments thereto; and the filing of any
registration statement (including any amendment thereto) of an investment
company under the Investment Company Act of 1940 and the rules and
regulations thereunder and any other documents to be filed with the U.S.
Securities and Exchange Commission and any and all documents required to be
filed with respect thereto with any other regulatory authority. Each of the
undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he/she could do if personally present, thereby ratifying all
that said attorneys-in-fact and agents, may lawfully do or cause to be done
by virtue hereof.
This power of attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which shall be deemed to
be a single document.
The undersigned Officers and Trustees hereby execute this Power of Attorney
as of the 17th day of July 1999.
/S/ CHARLES E. JOHNSON /S/ FRANK H. ABBOTT, III
Charles E. Johnson, Frank H. Abbott, III, Trustee
Principal Executive Officer and
Trustee
/S/ HARRIS J. ASHTON
Harris J. Ashton, Trustee Edward J. Bonach, Trustee
/S/ ROBERT F. CARLSON /S/ S. JOSEPH FORTUNATO
Robert F. Carlson, Trustee S. Joseph Fortunato, Trustee
/S/ CHARLES B. JOHNSON /S/ RUPERT H. JOHNSON
Charles B. Johnson, Trustee Rupert H. Johnson, Jr., Trustee
/S/ FRANK W.T. LAHAYE /S/ GORDON S. MACKLIN
Frank W.T. LaHaye, Trustee Gordon S. Macklin, Trustee
/S/ MARTIN L. FLANAGAN /S/ DIOMEDES LOO-TAM
Martin L. Flanagan, Principal Diomedes Loo-Tam, Principal
Financial Officer Acccounting Officer
