SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ x ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240-14a-11(c) or ss.240-14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e) (2))
Franklin Templeton Variable Insurance Products Trust
(Name of Registrant as Specified In Its Charter)
Franklin Templeton Variable Insurance Products Trust
(Name of Person(s) Filing Proxy Statement)
Karen L. Skidmore, Esq.
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary material.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ____________________________________
2) Form, Schedule or Registration Statement No. :_____________
3) Filing Party: _____________________________________________
4) Date Filed: _______________________________________________
[Insert Franklin Templeton Ben Head]
777 MARINERS ISLAND BLVD.
SAN MATEO, CALIFORNIA 94404
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
FRANKLIN SMALL CAP FUND
IMPORTANT INFORMATION FOR
CONTRACT HOLDERS
A special meeting of shareholders of the Franklin Small Cap Fund (the "Fund"), a
series of Franklin Templeton Variable Insurance Products Trust (the "Trust"),
will be held at the offices of the Trust located at 777 Mariners Island
Boulevard, San Mateo, California 94404, on February 8, 2000 at 10:00 a.m.
(Pacific time). These materials discuss the proposals to be voted on at the
special meeting, and contain a proxy statement and voting instruction card.
A voting instruction card is, in essence, a ballot. 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 insurance contract
allocation option that is invested in the Fund. If you complete and sign the
voting instruction card, the shares related to your contract will be voted
exactly as you instruct. If you simply sign the voting instruction card without
otherwise completing it, your insurance company will vote these shares for the
proposals. If you do not return a voting instruction card at all, your insurance
company will vote these shares in the same proportion as shares for which
instructions have been received from other owners of registered variable annuity
and variable life insurance contracts.
PLEASE SPEND A FEW MINUTES REVIEWING THE PROPOSALS DESCRIBED BELOW. 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.
TABLE OF CONTENTS
Notice of Special Meeting of Shareholders .............................. 1
Proxy Statement ........................................................ 2
Information About Voting ............................................... 2
Who is asking for my vote? ......................................... 2
Who is eligible to vote? ........................................... 2
On what issues am I being asked to vote? ........................... 2
What vote is required? ............................................. 3
How do the Trustees recommend that I vote? ......................... 3
Can I revoke my voting instruction? ................................ 3
The Proposals .......................................................... 4
Proposal 1: Approving or Disapproving the New Investment
Advisory Agreement ..................................................... 4
What are the terms of the existing and proposed contracts? ......... 4
How has the Fund performed under Franklin Advisers' direction? ..... 9
What factors did the Trustees consider prior to recommending
approval of the proposed contract? ................................. 10
Proposals 2 & 3 - Changes to the Fundamental Investment
Restrictions of the Fund ............................................... 11
Why are we proposing amendments or eliminating certain
fundamental investment restrictions? ............................... 11
Proposal 2: To Approve Amendments to Certain of the Fund's
Fundamental Investment Restrictions..................................... 13
Sub-Proposal 2a: To amend the Fund's fundamental investment
restriction regarding diversification of investments ............... 13
What effect will the change in the current investment
diversification restriction have on the Fund? ................... 13
Sub-Proposal 2b: To amend the Fund's fundamental investment
restriction regarding borrowing .................................... 14
What effect will the change in the current borrowing restriction
have on the Fund? ............................................... 14
Sub-Proposal 2c: To amend the Fund's fundamental investment
restriction regarding lending ...................................... 14
What effect will standardization of the current lending
restriction have on the Fund? ................................... 15
Sub-Proposal 2d: To amend the Fund's fundamental investment
restriction regarding underwriting ................................. 15
What effect will changing the current underwriting restriction
have on the Fund? ............................................... 16
Sub-Proposal 2e: To amend the Fund's fundamental investment
restrictions regarding investments in real estate and commodities .. 16
What effect will combining and revising the real estate and
commodities restrictions have on the Fund? ...................... 16
Sub-Proposal 2f: To amend the Fund's fundamental investment
restriction regarding issuing senior securities .................... 17
What effect will amending the restriction regarding issuing
senior securities have on the Fund? ............................. 18
Sub-Proposal 2g: To amend the Fund's fundamental investment
restriction regarding concentration of the Fund's investments
in the same industry ............................................... 18
What effect will amending the current restriction regarding
industry concentration have on the Fund? ........................ 18
Proposal 3: To Approve the Elimination of Certain of the Fund's
Fundamental Investment Restrictions .................................... 19
Which fundamental investment restrictions is the Board recommending
that the Fund eliminate? ........................................... 19
Illiquid and Restricted Securities .............................. 19
Control or Management ........................................... 20
Securities on Margin ............................................ 21
Investment in Other Investment Companies ........................ 21
Securities with Unlimited Liability ............................. 22
Management Ownership of Securities .............................. 22
Tax Diversification for Variable Annuity Funds .................. 22
Why are we recommending that the restrictions be eliminated? ....... 22
What are the risks, if any, in eliminating the restrictions? ....... 23
Other Business ......................................................... 23
Information About the Trust and the Fund ............................... 23
Additional Information About Voting and the Shareholders Meeting ....... 30
EXHIBITS
Exhibit A: Investment Advisory Agreement ............................... 32
Exhibit B: Fundamental Investment Restrictions Proposed to be
Amended or Eliminated .................................................. 41
Exhibit C: Current Fundamental Investment Restrictions Proposed
to be Eliminated ....................................................... 46
This page intentionally left blank.
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
FRANKLIN SMALL CAP FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the shareholders of the Franklin Small Cap Fund (the "Fund"), a series of
Franklin Templeton Variable Insurance Products Trust (the "Trust").
A special meeting of shareholders of the Fund will be held at the offices of the
Trust located at 777 Mariners Island Boulevard, San Mateo, California 94404, on
February 8, 2000 at 10:00 a.m. (Pacific time).
During the meeting, shareholders of the Fund as of the close of business on
November 30, 1999 will vote on the proposals listed below.
o A new investment advisory agreement between Franklin Advisers, Inc. and the
Trust on behalf of the Fund, as described in the Proxy Statement.
o Changes to certain fundamental investment restrictions of the Fund.
o Elimination of certain fundamental investment restrictions of the Fund.
In addition, shareholders are asked to grant authority to the proxy holders to
vote in their discretion on any other business as may properly come before the
meeting. The Trustees do not intend to bring any other business before the
meeting and are not currently aware of any other business to be presented at the
meeting.
By order of the Trustees,
Deborah R. Gatzek
Secretary
December 20, 1999
- -----------------------------------------------------------------------------
PLEASE FILL IN, SIGN, DATE AND MAIL THE VOTING
INSTRUCTION CARD IN THE POSTAGE-PAID ENVELOPE
PROVIDED SO YOU WILL BE REPRESENTED AT THE MEETING.
- -----------------------------------------------------------------------------
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
PROXY STATEMENT
INFORMATION ABOUT VOTING
WHO IS ASKING FOR MY VOTE?
The management of Franklin Templeton Variable Insurance Products Trust (the
"Trust") is asking for the vote of shareholders of the Franklin Small Cap Fund
(the "Fund") at a special shareholders meeting to be held on February 8, 2000 at
10:00 a.m. (Pacific time) and, if the meeting is adjourned, at any later time,
for the purposes stated in the Notice of Special Meeting. While only insurance
companies are the shareholders of the Fund, these insurance companies will vote
in accordance with your instructions. Thus, your insurance company is sending
you this proxy statement to obtain your voting instructions.
We expect to send this proxy statement to shareholders on or about December 20,
1999. On approximately this date, your insurance company will also send this
proxy statement to all applicable owners of variable annuity and variable life
insurance contracts.
WHO IS ELIGIBLE TO VOTE?
SHAREHOLDERS. Shareholders of record of the Fund as of close of business on
November 30, 1999 may attend the meeting and vote. 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.
CONTRACT OWNERS. If your contract is allocated to a subaccount of a separate
account that invests in the Fund, you will be able to give voting instructions
to your insurance company. If you complete and sign the voting instruction card,
the shares related to your contract 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, your insurance company will vote these shares in the
same proportion as shares for which instructions have been received from other
owners of registered variable annuity and variable life insurance contracts.
ON WHAT ISSUES AM I BEING ASKED TO VOTE?
You are being asked to give voting instructions on three proposals:
o A new investment advisory agreement between Franklin Advisers, Inc.
("Franklin Advisers") and the Trust on behalf of the Fund, as described in
this document, which will increase the total expenses of the Fund.
o Changes to certain fundamental investment restrictions of the Fund.
o Elimination of certain fundamental investment restrictions of the Fund.
In addition, you are being asked to instruct your insurance company to grant
authority to the proxy holders to vote in their discretion on any other business
as may properly come before the meeting. The trustees of the Trust (the
"Trustees") do not intend to bring any other business before the meeting and are
not currently aware of any other business to be presented at the meeting.
WHAT VOTE IS REQUIRED?
Approval of all the proposals being presented at the shareholders meeting
requires the favorable vote of a majority of the outstanding shares of the Fund,
as defined in the Investment Company Act of 1940 (the "1940 Act"). A majority
vote means the vote of the lesser of (i) a majority of the Fund's outstanding
shares, or (ii) 67% or more of the Fund's shares represented at the meeting if
more than 50% of the outstanding shares are represented.
HOW DO THE TRUSTEES RECOMMEND THAT I VOTE?
The Trustees recommend that you vote FOR all the proposals being presented at
the shareholders meeting. In addition, if any other proposals are properly
presented at the meeting, the Trustees suggest that you instruct your insurance
company to grant the proxy holders the authority to vote in their discretion.
The Trustees are not currently aware of any other business to be presented.
CAN I REVOKE MY VOTING INSTRUCTION?
You may revoke your voting instruction at any time before the proxy is voted by:
o delivering a written revocation to the Secretary of the Trust;
o forwarding to the Trust a later-dated voting instruction that is received
by the Trust at or prior to the meeting; or
o attending the meeting and giving new voting instructions in person.
THE PROPOSALS
PROPOSAL 1: APPROVING OR DISAPPROVING
THE NEW INVESTMENT ADVISORY AGREEMENT
You are being asked to approve a proposed investment advisory agreement between
Franklin Advisers and the Trust on behalf of the Fund. The proposed agreement
will modify the Fund's current fee structure by:
o eliminating Franklin Advisers' responsibility for providing services for
the day-to-day operations of the Fund;
o requiring the Fund to enter into a new fund administration agreement with
Franklin Templeton Services, Inc. ("FT Services"), an affiliate of the
Fund, and paying a separate fund administration fee to FT Services; and
o creating more investment advisory fee rates for different levels of assets,
or "break-points."
As a result of the change in the current fee structure, the total annual
operating expenses for the Fund will be slightly higher.
Franklin Advisers proposed the modified fee structure to be more consistent with
the fee structure of similar funds. In addition, the new fee structure allows
for additional break-points in the investment advisory fee rate.
The Trustees approved the proposed contract at a meeting held on October 22,
1999. The Trustees believe that as a result of the revised fee structure the
Fund and its shareholders will continue to receive high quality services.
WHAT ARE THE TERMS OF THE EXISTING AND PROPOSED CONTRACTS?
THE EXISTING CONTRACT. The existing contract, dated October 11, 1995, provides
that Franklin Advisers shall render investment management services to the Fund
subject to the control and supervision of the Trustees. The initial shareholder
of the Fund approved the existing contract on October 11, 1995. The Trustees
last approved continuance of the existing contract through April 30, 2000, at a
meeting held on April 15, 1999.
By its terms, the existing contract will continue in effect from year to year so
long as approved annually by the Trustees (at a meeting called for that purpose)
or by vote of a majority of the Fund's outstanding shares. In either case,
renewal of the existing contracts must be approved by a majority of the trustees
that satisfy the independence requirement under the federal securities laws
("Independent Trustees"). The existing contract is 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 contract, subject to the control and supervision of the
Trustees, Franklin Advisers:
o manages the investment and reinvestment of the Fund's assets in accordance
with the 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 contract, Franklin Advisers is required
to comply with the provisions of the Trust's Agreement and Declaration of Trust
and By-Laws and the Fund's stated investment objectives, policies and
restrictions.
The existing contract provides that Franklin Advisers will abide by the 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 Franklin Advisers reduce its expenses or otherwise benefit
Franklin Advisers, its clients, its affiliates and the Fund, the value of these
services is indeterminable and Franklin Advisers' fee is not reduced by any
offsetting or compensating arrangement.
Currently, Franklin Advisers is also responsible for providing other services
for the day-to-day operations of the Fund. Franklin Advisers contracts with FT
Services to provide fund administration services to the Fund. These services
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. Out of the fees it
receives from the Fund, Franklin Advisers pays FT Services for the fund
administration services.
The existing contract also provides that Franklin Advisers, 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, Franklin Advisers received
$2,365,309 from the Fund.
THE PROPOSED CONTRACT. The proposed contract will require that Franklin Advisers
provide the same investment advisory services. The proposed contract, however,
no longer requires Franklin Advisers to provide fund administration services to
the Fund. Instead, these services will be provided by FT Services under a
separate contract. In addition, the proposed contract includes more investment
advisory fee rates for different levels of assets, or "break-points". The
current fees and the proposed fees are set forth below:
<TABLE>
<CAPTION>
PROPOSED INVESTMENT ADVISORY FEE
CURRENT INVESTMENT ADVISORY FEE (WILL NOT INCLUDE ADMINISTRATIVE SERVICES)
(INCLUDES ADMINISTRATIVE SERVICES)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RATE ASSETS RATE ASSETS
- ---------------------------------------------------------------------------------------------------
0.750% Up to and including 0.550% Up to and including
$500 million $500 million
0.625 Over $500 million, up to and 0.450 Over $500 million, up to and
including $1 billion including $1 billion
0.500 Over $1 billion 0.400 Over $1 billion, up to and
including $1.5 billion
0.350 Over $1.5 billion, up to and
including $6.5 billion
0.325 Over $6.5 billion, up to and
including $11.5 billion
0.300 Over $11.5 billion, up to and
including $16.5 billion
0.290 Over $16.5 billion, up to and
including $19 billion
0.280 Over $19 billion, up to and
including $21.5 billion
0.270 Over $21.5 billion
</TABLE>
<TABLE>
<CAPTION>
CURRENT ADMINISTRATION FEE PROPOSED ADMINISTRATION FEE
(PAID FROM INVESTMENT ADVISORY FEE) (PAID BY THE FUND)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RATE NET ASSETS RATE NET ASSETS
- ---------------------------------------------------------------------------------------------------
0.150% Up to and including 0.250% Annual flat rate on all assets
$200 million
0.135 Over $200 million, up to and
including $700 million
0.100 Over $700 million, up to and
including $1.2 billion
0.075 Over $1.2 billion
</TABLE>
<TABLE>
<CAPTION>
CURRENT TOTAL FEES PROPOSED TOTAL FEES
(INVESTMENT MANAGEMENT AND ADMINISTRATION FEE) (INVESTMENT MANAGEMENT AND
ADMINISTRATION FEE)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RATE NET ASSETS RATE NET ASSETS
- ---------------------------------------------------------------------------------------------------
0.750% Up to and including 0.800% Up to and including
$500 million $500 million
0.625 Over $500 million, up to and 0.700 Over $500 million, up to and
including $1 billion including $1 billion
0.500 Over $1 billion 0.650 Over $1 billion, up to and
including $1.5 billion
0.600 Over $1.5 billion, up to and
including $6.5 billion
0.575 Over $6.5 billion, up to and
including $11.5 billion
0.550 Over $11.5 billion, up to and including
$16.5 billion
</TABLE>
<TABLE>
<CAPTION>
CURRENT TOTAL FEES PROPOSED TOTAL FEES
(INVESTMENT MANAGEMENT (INVESTMENT MANAGEMENT AND
AND ADMINISTRATION FEE) ADMINISTRATION FEE)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RATE NET ASSETS RATE NET ASSETS
- ---------------------------------------------------------------------------------------------------
0.540 Over $16.5 billion, up to and
including $19 billion
0.530 Over $19 billion, up to and
including $21.5 billion
0.520 Over $21.5 billion
</TABLE>
If approved, the proposed contract will become effective May 1, 2000 and will
continue in effect until April 30, 2002, and thereafter from year to year as
long as approved annually by the Trustees at a meeting called for that purpose
or by a vote of the Fund's shareholders. A copy of the proposed investment
advisory agreement for the Fund is attached as Exhibit A.
COMPARISON OF FEES AND EXPENSES UNDER THE EXISTING CONTRACT
AND THE PROPOSED CONTRACT.
The following tables and example are provided to help you understand and compare
the various costs and expenses of the Fund that would be borne directly or
indirectly by the shareholders of the Fund under the existing contract and the
proposed contract. The tables include only expenses and fees charged at the Fund
level and do not reflect separate account or contract-based fees and expenses or
sales loads.
Shown below is a comparison of fees and expenses the Fund incurred during the
fiscal year ended December 31, 1998, and the fees and expenses the Fund would
have incurred had the proposed fee increase been in effect during that same
period.
COMPARISON OF FEES
<TABLE>
<CAPTION>
CLASS 1 CLASS 2
- ------------------------------------------------------------------------------------------------
FEE RATES PAID BY THE FUND TO THE
INVESTMENT ADVISER
<S> <C> <C>
Current Investment Advisory Fee ..................... 0.60% 0.60%
Proposed Investment Advisory Fee .................... 0.55% 0.55%
Change .............................................. (0.05%) (0.05%)
Current Fund Administration Fee ..................... 0.15% 0.15%
Proposed Fund Administration Fee .................... 0.00% 0.00%
Change .............................................. (0.15%) (0.15%)
Total Current Fee Rate Paid to the
Investment Adviser .................................. 0.75% 0.75%
Total Proposed Fee Rate Paid to the
Investment Adviser .................................. 0.55% 0.55%
Change ............................................... (0.20%) (0.20%)
FEE RATES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ...................... 0.00% 0.00%
Proposed Fund Administration Fee ..................... 0.25% 0.25%
Change ............................................... 0.25% 0.25%
TOTAL FEES PAID BY THE FUND TO THE
INVESTMENT ADVISER
Current Investment Advisory Fee ...................... $ 1,909,555 $ 1,909,555
Current Fund Administration Fee ...................... $ 455,754 $ 455,754
--------------------------------------------
TOTAL CURRENT ........................................ $ 2,365,309 $ 2,365,309
Proposed Investment Advisory Fee ..................... $ 1,733,827 $ 1,733,827
Proposed Fund Administration Fee ..................... $ 0 $ 0
--------------------------------------------
TOTAL PROPOSED ....................................... $ 1,733,827 $ 1,733,827
DIFFERENCE BETWEEN PROPOSED AND
CURRENT ............................................... ($ 631,482) ($ 631,482)
DIFFERENCE BETWEEN PROPOSED AND
CURRENT AS A PERCENTAGE ............................... (26.70%) (26.70%)
TOTAL FEES PAID BY THE FUND TO THE
FUND ADMINISTRATOR
Current Fund Administration Fee ...................... $ 0 $ 0
Proposed Fund Administration Fee ..................... $ 788,103 $ 788,103
--------------------------------------------
Change ............................................... $ 788,103 $ 788,103
TOTAL INVESTMENT ADVISORY AND FUND
ADMINISTRATION FEES
Current Agreement .................................... $ 2,365,309 $ 2,365,309
Proposed Agreements .................................. $ 2,521,930 $ 2,521,930
DIFFERENCE BETWEEN AGGREGATE
AMOUNTS ............................................. $ 156,621 $ 156,621
--------------------------------------------
AVERAGE NET ASSETS OF FUND FOR FISCAL
YEAR ENDED DECEMBER 31, 1998 ........................ $315,241,243 $315,241,243
============================================
</TABLE>
COMPARISON OF TOTAL ANNUAL FUND OPERATING EXPENSES
CLASS 1 CLASS 2
------------------------------------------
ANNUAL FUND EXPENSES CURRENT PROPOSED CURRENT PROPOSED
- --------------------------------------------------------------------------------
Investment Management Fee
Investment Advisory Fee* ....... 0.60% 0.55% 0.60% 0.55%
Fund Administration Fee* ....... 0.15% 0.25% 0.15% 0.25%
Total Investment
Management Fee .................. 0.75% 0.80% 0.75% 0.80%
Distribution Fees ............... None None 0.25% 0.25%
Other Expenses .................. 0.02% 0.02% 0.02% 0.02%
Total Fund Annual
Operating Expenses ..... 0.77% 0.82% 1.02% 1.07%
*These figures are separated for purposes of this comparison, as discussed in
this proxy statement.
The following example illustrates, for both the existing fee schedule and the
proposed fee increase, the expenses you would incur on a $10,000 investment,
assuming a 5% annual rate of return and redemption at the end of each period
shown. The example uses a 5% annual rate of return, as required by the federal
securities laws. This is an illustration only, actual expenses and performance
may be more or less than shown. THESE EXAMPLES DO NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. If they were, 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 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT PROPOSED CURRENT PROPOSED CURRENT PROPOSED CURRENT PROPOSED
Class 1 $ 79 $ 84 $246 $262 $428 $455 $ 954 $1,014
Class 2 $104 $109 $325 $340 $563 $590 $1,248 $1,306
</TABLE>
HOW HAS THE FUND PERFORMED UNDER FRANKLIN ADVISERS' DIRECTION?
The Fund's performance for the periods ending September 30, 1999 is set forth in
the following chart. All performance figures shown reflect all Fund operating
expenses, but do not include deductions under the variable annuity and variable
life insurance contracts for which the Fund serves as an underlying investment
vehicle. If these deductions had been included, performance would have been
lower. Please refer to your contract prospectus for a complete description of
expenses, including any applicable sales charges. Please remember that the
performance data shown below is historical and cannot predict or guarantee
future results. Principal value and investment return will vary and you may have
a gain or loss when you withdraw your money.
CLASS 1 CLASS 2*
-------------------------------------------------------------
INCEPTION DATE NOVEMBER 1, 1995 NOVEMBER 1, 1995
- --------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE AVERAGE ANNUAL CUMULATIVE
TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN
1 year ............. 52.16% 52.16% 51.80% 51.80%
3 years ............ 14.07% 48.42% 13.88% 48.06%
Since inception .... 17.45% 87.81% 17.38% 87.36%
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 the Fund, which may have started
before your 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.
*Standardized performance for class 2 shares reflects a "blended figure,"
combining: (a) for periods prior to class 2's inception on 1/6/99, historical
results of class 1 shares, and (b) for periods after 1/6/99, class 2's results
reflecting an additional 12b-1 expense, which also affects all future
performance.
WHAT FACTORS DID THE TRUSTEES CONSIDER PRIOR TO RECOMMENDING APPROVAL OF THE
PROPOSED CONTRACT?
The Trustees consulted their own attorneys and reviewed extensive information
provided by Franklin Advisers and the Trust's attorneys and third parties. The
nature of the matters to be considered and the standards to be used by the
Trustees in reaching a decision were reviewed by the Trust's attorneys and the
attorneys to the Independent Trustees. After review and discussions of the
information, the Independent Trustees discussed the information and considered
the factors to be weighed and standards to be applied in evaluating the proposed
fee increase.
The Trustees first examined the nature, quality and scope of the services
provided to the Fund by Franklin Advisers and by FT Services. Second, they
reviewed the basis for the change in the fee structure and increase in the fund
administration fee and analyzed the fee structure proposed by Franklin Advisers
in terms of the total expenses of the Fund and other similar funds.
After consideration of all of the data and information provided to them to
evaluate the new fee structure proposed by Franklin Advisers, the Trustees,
including the Independent Trustees, discussed the proposed fee structure with
representatives of Franklin Advisers. The Independent Trustees unanimously
decided to recommend that the Trustees approve the proposed contract. Then, the
Trustees unanimously approved the fee structure reflected in the proposed
contract.
The Trustees considered, among other factors:
o the effect of the proposed investment advisory fee and fund administration
fee structure on the expense ratio of the Fund;
o the effect of the proposed investment advisory fee and fund administration
fee structure on the nature or level of services to be provided to the
Fund;
o the investment performance of the Fund;
o information on the investment performance, advisory fees, administration
fees and expense ratios of other investment companies within the Franklin
Templeton group of funds;
o information on the investment performance, advisory fees, administration
fees and expense ratios of other investment companies not advised by the
Franklin Advisers but believed to be generally comparable to the Fund; and
o the need of Franklin Advisers and FT Services to maintain and enhance their
ability to retain and attract capable personnel to serve the Fund.
In their review of the proposed increase in the total Fund expenses, the
Trustees considered the fact that the current fees paid by the Fund are ranked
in the lowest quartile of all similar funds offered through insurance contracts.
Information prepared specifically for the purpose of assisting the Independent
Trustees in their evaluation of the proposed contract included an analysis of
the performance and expenses of the Fund prepared from Lipper Analytical
Services, Inc. ("Lipper"). The Trustees also took into account the fact that the
Fund's current total expense ratios are below the median fee and average fee
rates and expense ratios of mutual funds within the appropriate Lipper category.
Moreover, if the proposed contract had been in effect, the total expense ratio
for the Fund would have been between the lowest to the second lowest quartile
for its group - or below the median and average for its group.
The Trustees recognized that the Fund's proposed fund administration fee is
slightly higher than those of similar funds offered to individual investors. The
Trustees considered that the slightly higher amount was attributable to the
increased fund administration services that the Fund is required to provide to
insurance company shareholders. In particular, additional fund administration
services are required for:
o additional tax compliance testing and reporting;
o responding to inquiries from insurance company shareholders and their
contract owners; and
o customizing prospectuses and shareholder reports.
The Trustees determined that the modestly higher amount in fee was appropriate
to maintain and enhance FT Services' ability to provide competitive services on
behalf of the Fund and to retain and attract capable personnel to serve the
Fund.
The Trustees also considered the proposed changes to the fundamental investment
restrictions as set forth in proposals 2 and 3.
Based upon the factors and information described above, the Trustees concluded
that the proposed fee increase represents an appropriate level of compensation
for the services rendered, and approved the proposed contract, subject to
shareholder approval, effective May 1, 2000.
THE TRUSTEES RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE NEW INVESTMENT ADVISORY
AGREEMENT.
PROPOSALS 2 & 3 - CHANGES TO THE
FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUND
INTRODUCTION
WHY ARE WE PROPOSING AMENDMENTS OR ELIMINATING CERTAIN
FUNDAMENTAL INVESTMENT RESTRICTIONS?
Recent changes in federal law no longer require that funds be subject to certain
investment restrictions. 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:
RESTRICTION
PROPOSAL 3 - MODIFICATION OF RESTRICTIONS
(each sub-proposal must be individually approved)
(a) Diversification
(b) Borrowing
(c) Lending
(d) Underwriting
(e) Concentration
(f) Senior Securities
(g) Real Estate and Commodities*
PROPOSAL 4 - ELIMINATION OF RESTRICTIONS
(all of the following approved as a group)
Illiquid Securities**
Exercising Control or Management
Margin Securities
Investment in Other Investment Companies
Securities with Unlimited Liability
Restricted Securities
Management Ownership of Securities
Compliance with Section 817(h)
*Currently two restrictions that will be combined into one, as modified.
**There are two restrictions with respect to illiquid securities that we are
proposing to eliminate.
The 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, certain legal and regulatory requirements applicable to mutual funds
changed. The Fund currently is subject to fundamental investment restrictions
that are 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
Fund's existing investment restrictions, together with the recommended changes
to these restrictions, are detailed in Exhibit B, which is entitled "Fundamental
Investment Restrictions Proposed to be Amended or Eliminated."
The proposed changes will not affect the Fund's investment goal. Although the
proposed changes in fundamental investment restrictions will provide the 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 the Fund is managed.
PROPOSAL 2: TO APPROVE AMENDMENTS
TO CERTAIN OF THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTIONS
(THIS PROPOSAL INVOLVES SEPARATE VOTES ON SUB-PROPOSALS 2A - 2G)
SUB-PROPOSAL 2A: TO AMEND THE 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, the 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, the
Fund's current restriction prohibits the Fund from holding more than 10% of "any
or all classes" of the securities of an issuer. Since the 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 FUND?
Amending the Fund's diversification policy would make it consistent with the
current definition of a diversified investment company under the 1940 Act, and
would provide the 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, the 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.
The 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 the Fund's current restriction would
permit the 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.
SUB-PROPOSAL 2B: TO AMEND THE 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 THE
FUND?
The Fund's restriction only permits it to borrow from banks an amount not
exceeding one-third of the value of the Fund's total asset including the amount
borrowed. The proposed restriction would clarify that the 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 the Fund to borrow cash from affiliated
investment companies. The Fund, together with other Franklin Templeton funds,
has requested an order from the Securities and Exchange Commission ("SEC") that
would permit the Fund to borrow money from affiliated Franklin Templeton funds
(the "Interfund Borrowing and Lending Order"). As discussed in Sub-Proposal 2c,
the Interfund Borrowing and Lending Order also would permit the Fund to lend
money to other Franklin Templeton funds. If the Interfund Borrowing and Lending
Order is approved, the proposed restriction would permit the Fund, under certain
circumstances, to borrow money from other Franklin Templeton funds at rates
which are more favorable than those which the Fund would receive if it borrowed
from banks or other lenders.
Since the proposed borrowing restriction would provide the Fund with greater
borrowing flexibility, the Fund may be subject to additional costs, as well as
the risks inherent to borrowing, such as reduced total return.
SUB-PROPOSAL 2C: TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING LENDING.
Certain investment techniques could, under certain circumstances, be considered
to be loans. For example, if the Fund invests in debt securities, such
investments might be considered to be loans from the Fund to the issuer of the
debt securities. In order to ensure that the Fund may invest in bonds,
debentures or other debt securities or repurchase agreements, which could
technically be characterized as the making of loans, the Fund's current
fundamental restriction excludes these securities from the restrictions. In
addition, the Fund's fundamental policy explicitly permits the 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
FUND?
The proposed restriction would provide the Fund with greater lending
flexibility. While the proposed restriction retains the carve-outs in the
existing restriction, it also would provide the 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 the 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 the Fund's
ability to respond to changes in legal, market, industry or regulatory
conditions.
SUB-PROPOSAL 2D: TO AMEND THE 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 FUND?
The proposed restriction is substantially similar to the Fund's current
restriction. As with the current restriction, the proposed restriction
specifically permits the Fund to resell restricted securities in those instances
where there may be a question as to whether the Fund is technically acting as an
underwriter. The proposed underwriting restriction also clarifies that the 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 the 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 the Fund is
currently managed.
SUB-PROPOSAL 2E: TO AMEND THE 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. The Fund presently has two separate
investment restrictions that govern the 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 the Fund may invest.
WHAT EFFECT WILL COMBINING AND REVISING THE REAL ESTATE AND COMMODITIES
RESTRICTIONS HAVE ON THE FUND?
The proposed restriction would combine the limitations on investing in both real
estate and commodities into one restriction.
REAL ESTATE: The 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 the Fund's ability to purchase
securities of real estate investment trusts ("REITs") to the extent that an
investment in REITs would otherwise meet the 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.
The 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 Fund as the Fund does not currently, and has not in the
past, invested in real estate or REITs. Therefore, the proposed restriction will
not affect the way the Fund is 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 the 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 the Fund has always had the ability to
invest in options on securities and options on futures, it has not done so. The
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 2F: TO AMEND THE 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 a 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 books or its custodian bank's books, or
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 the Fund's current fundamental and non-fundamental investment
restrictions relate to senior securities. For example, the Fund currently is
prohibited from purchasing securities on margin and making short sales. The 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, the 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 2f would consolidate into one
investment restriction: (1) a concise statement of the Fund's senior security
restriction, as well as (2) the Fund's current fundamental and non-fundamental
restrictions that address senior security issues. The part of the Fund's current
restriction relating to the purchase of securities on margin is proposed to be
eliminated in Proposal 3. 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 FUND?
The proposed restriction would permit the Fund to engage in permissible types of
leveraging transactions. The proposed restriction would permit the Fund to
engage in options, futures contracts, forward contracts, repurchase transactions
or reverse repurchase transactions. The proposed restriction also would permit
the Fund to make short sales as permitted under the 1940 Act, and any exemptions
available under the 1940 Act. Essentially, the proposed restriction clarifies
the 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 the 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 2G: TO AMEND THE 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 FUND?
The 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 the 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 the 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 by the new concentration restriction will help the 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 the Fund currently is managed, as the 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 UNANIMOUSLY RECOMMENDS THAT YOU APPROVE SUB-PROPOSALS
2A-2G
PROPOSAL 3: TO APPROVE THE ELIMINATION OF CERTAIN
OF THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS
WHICH FUNDAMENTAL INVESTMENT RESTRICTIONS IS THE BOARD RECOMMENDING THAT THE
FUND ELIMINATE?
The 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, the Fund is no longer legally required to include
some of the current restrictions among its fundamental investment restrictions.
Eliminating these investment restrictions will standardize the Fund's
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. The exact wording of these restrictions
(referred to in this Proposal 3 as the "Restrictions") has been compiled in
Exhibit C, which is entitled "Current Fundamental Investment Restrictions
Proposed to be Eliminated," for ease of reference.
ILLIQUID AND RESTRICTED SECURITIES
The 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, the 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, the 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 the 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 the Fund with
additional investment flexibility. Although the Fund's policy relating to
illiquid securities would no longer be fundamental, the Fund would continue to
be subject to the SEC rules and regulations in this area.
The Fund has 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 the Fund greater
flexibility to invest in restricted securities.
Elimination of these restrictions should not have an impact on the day-to-day
management of the Fund as the Fund does not currently intend to increase the
percentages in which the Fund invests in either illiquid or restricted
securities.
CONTROL OR MANAGEMENT
The Fund has adopted a current fundamental investment restriction that limits
the 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 the Fund because the 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 2a). The
diversification restriction limits the 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.
SECURITIES ON MARGIN
The Fund has adopted a current fundamental investment restriction that limits
the Fund's ability to purchase securities on margin or sell securities short.
This restriction was originally included in response to various state law
requirements. The Fund is no longer required by state law to retain specific
fundamental policies regarding these types of investment activities.
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 the Fund, since the 1940 Act prohibitions on these types of
transactions would continue to apply to the Fund.
INVESTMENT IN OTHER INVESTMENT COMPANIES
A current investment restriction of the Fund limits the Fund's ability to invest
in other open-end investment companies except in connection with a merger,
consolidation, acquisition or reorganization. This restriction, which is
inconsistent with the 1940 Act provisions in this regard, was originally
included in the Fund's fundamental investment restrictions in response to
various state law requirements. Now the Fund is no longer legally required to
retain such a policy as a fundamental restriction.
Upon elimination of this restriction, the Fund would remain subject to the 1940
Act restrictions (or any exemption from such restrictions) on the Fund's ability
to invest in other open-end funds. The 1940 Act restrictions state that a fund
may not purchase more than 3% of another fund's total outstanding voting stock,
commit more than 5% of its assets to the purchase of another fund's securities,
or have more than 10% of its total assets invested in securities of all other
funds.
Elimination of this restriction should not have an impact on the day-to-day
management of the Fund as the Fund does not intend to begin pursuing its
investment objective through the purchase of other open-end investment company
securities. Elimination of the restriction would, however, permit the Fund to
invest cash held at the end of the day in money market funds. This would permit
the 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 invested in other investment
companies in certain limited circumstances.
SECURITIES WITH UNLIMITED LIABILITY
The Fund has adopted a current fundamental investment restriction that limits
the 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. The 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 the Fund as the Fund has not previously, nor does it currently
intend, to invest in securities with unlimited liability.
MANAGEMENT OWNERSHIP OF SECURITIES
The Fund has a current restriction that limits its 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 the Fund, as the 1940 Act restrictions
still apply to the Fund.
TAX DIVERSIFICATION FOR VARIABLE ANNUITY FUNDS
The 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 the 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, the 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. The 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 the Fund, since the restrictions of
the Code and applicable Treasury Regulations will continue to apply to the Fund,
and the 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.
WHY ARE WE RECOMMENDING THAT THE RESTRICTIONS BE ELIMINATED?
We have determined that eliminating the restrictions is consistent with the
federal securities laws. This will also modify the 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 the 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 the
Fund's shareholders as it will provide the 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 the Fund. Although the Fund's current restrictions, as
drafted, are no longer legally required, the 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, the Fund has
no current intention of changing its present investment practices as a result of
eliminating these restrictions.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE PROPOSAL 3
OTHER BUSINESS
The Trustees know of no other business to be presented at the meeting. If,
however, any additional matters should be properly presented, proxies will be
voted as specified. Proxies reflecting no specification will be voted in
accordance with the judgment of the persons named in the proxy.
INFORMATION ABOUT THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on April 26, 1988 and
is registered under the 1940 Act as an open-end diversified investment
management company. The Trust currently has twenty-six series of shares. Each
series has two classes of shares, class 1 and class 2. Each class is identical,
except that class 2 has a distribution plan. Only the Small Cap Fund of the
Trust would be affected by the proposals in this proxy statement.
Shares of the Fund are sold only to insurance company separate accounts to serve
as the investment vehicle for certain variable annuity and life insurance
contracts.
The following table shows the net assets and shares outstanding of the Fund as
of November 30, 1999:
NUMBER OF
SHARES
NET ASSETS OUTSTANDING
- -----------------------------------------------------------------------
Class 1 $398,106,182.14 18,261,091.153
Class 2 $ 3,507,436.06 161,291,819
As of November 30, 1999, Allianz Life Insurance Company of North America
("Allianz Life"), 1750 Hennepin Avenue, Minneapolis, Minnesota 55403-2195 owned,
on behalf of certain separate accounts, more than 5% of the Fund's outstanding
shares:*
ALLIANZ LIFE PERCENT OF PREFERRED LIFE PERCENT OF
SEPARATE OUTSTANDING SEPARATE OUTSTANDING
ACCOUNT B SHARES ACCOUNT C SHARES
- --------------------------------------------------------------------------------
CLASS 1 17,416,298.448 95.37% 844,792.705 4.63%
CLASS 2 844,792.705 23.58% - -
HARTFORD LIFE AND PERCENT OF HARTFORD LIFE PERCENT OF
ANNUITY SEPARATE OUTSTANDING SEPARATE OUTSTANDING
ACCOUNT SEVEN SHARES ACCOUNT SEVEN SHARES
- --------------------------------------------------------------------------------
CLASS 1 - - - -
CLASS 2 77,155.458 47.84% 46,079.960 28.57%
AMERICAN
ENTERPRISE PERCENT OF
VARIABLE ANNUITY OUTSTANDING
ACCOUNT SHARES
- --------------------------------------------------------------------------------
CLASS 1 - -
CLASS 2 26.074 0.02%
*Edward J. Bonach (45) serves as a Trustee of the Trust and is President-Special
Markets and Chief Actuary of Allianz Life Insurance Company of North America;
President and Chief Executive Officer of Canadian American Financial
Corporation; and Chairman of the Board and Chief Executive Officer of Preferred
Life Insurance Company of New York and Life USA Holding, Inc. Mr. Bonach may be
viewed as an interested person of the Fund under the 1940 Act because of the
holdings of Fund shares by Allianz Life.
However, the above-named insurance companies will exercise voting rights
attributable to the shares held by them in accordance with voting instructions
received from owners of registered variable annuity and variable life contracts.
To this extent, such insurance companies do not exercise control over the Trust
or the Fund by virtue of the voting rights arising from their record ownership
of Trust shares.
The Trust's last audited financial statements and annual report, and a copy of
its semi-annual report for any subsequent semi-annual period are available free
of charge. To obtain a copy, please call Franklin(R) Templeton(R) 1-800/342-3863
or write to Franklin(R) Templeton(R) at 777 Mariners Island Boulevard, P.O. Box
7777, San Mateo, California 94403-7777. You can also obtain information about
the Fund 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. 20549-6009. You can also visit the
SEC's Internet site at http://www.sec.gov
FRANKLIN ADVISERS. Franklin Advisers, Inc. is a California corporation formed on
October 31, 1985 and is based in San Mateo, California. Franklin Advisers is
registered as an investment adviser with the Securities and Exchange Commission
under the Investment Advisers Act of 1940. It is also registered as an
investment adviser in the State of California. Franklin Advisers 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 New York Stock Exchange, Inc. listed holding company (NYSE: BEN).
The principal shareholders of Resources 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.
Franklin Advisers provides investment advisory and portfolio management services
to most of the funds in the Franklin Group of Funds.
The principal executive officers of Franklin Advisers are:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------- ----------------------------- ------------------------------
Charles B. Johnson Executive Manager 777 Mariners Island Blvd.
Director and San Mateo, California
Chairman of the Board
Rupert H. Johnson, Jr. Securities Analyst 777 Mariners Island Blvd.
Director and President San Mateo, California
R. Martin Wiskemann Securities Analyst 777 Mariners Island Blvd.
Director and San Mateo, California
Senior Vice President
Harmon E. Burns Attorney 777 Mariners Island Blvd.
Executive Vice President San Mateo, California
Martin L. Flanagan Accountant 777 Mariners Island Blvd.
Executive Vice President San Mateo, California
Deborah R. Gatzek Attorney 777 Mariners Island Blvd.
Executive Vice President San Mateo, California
and Assistant Secretary
Edward B. Jamieson Securities Analyst 777 Mariners Island Blvd.
Executive Vice President San Mateo, California
Jack Lemein Securities Analyst 777 Mariners Island Blvd.
Executive Vice President San Mateo, California
Sheila Amoroso Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Matt Avery Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Roger Bayston Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Rafael Costas Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Frank M. Felicelli Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Sally Haff Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Conrad Herrmann Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Chauncey Lufkin Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------- ----------------------------- ------------------------------
Christopher Molumphy Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Thomas Runkel Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Bernard Schroer Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Thomas Walsh Securities Analyst 777 Mariners Island Blvd.
Senior Vice President San Mateo, California
Benjamin Barber Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Doug Barton Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Catherine Bowman Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Kenneth Broad Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Molly Butler Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Canyon Chan Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Tony Coffey Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Lisa Costa Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Fred Fromm Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Shan Green Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
John Hopp Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Steven Hiatt Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Jeff Holbrook Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Charles E. Johnson Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Gregory E. Johnson Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Ian Link Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Michael McCarthy Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Evan McCulloch Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Thomas Orphanos Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Mark Orsi Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- ------------------------------- ----------------------------- ------------------------------
Scott Owens Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Serena Perin Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Ed Perks Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
John Pomeroy Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
David Rath Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Betsy Schwab Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Kent Shepherd Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Richard Smyth Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Theresa Spath Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Eric Takaha Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Kurt Von Emster Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Glenn Voyles Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
John Wiley Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Jeffrey Wilson Securities Analyst 205 9th Street N.
Vice President St. Petersburg, Florida
Stella Wong Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Robert Yolland Securities Analyst 777 Mariners Island Blvd.
Vice President San Mateo, California
Charles R. Sims Accountant 777 Mariners Island Blvd.
Vice President San Mateo, California
Kenneth A. Lewis Accountant 777 Mariners Island Blvd.
Vice President San Mateo, California
Leslie M. Kratter Attorney 777 Mariners Island Blvd.
Secretary San Mateo, California
</TABLE>
Some of the principal executive officers of Franklin Advisers are also Trustees
or officers of the Trust. The names and biographical information of these
persons:
*Charles B. Johnson (66) Chairman of the Board and Trustee
777 Mariners Island Blvd.
San Mateo, CA 94404
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 50 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles E. Johnson (42) President and Trustee
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58) Vice President and Trustee
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.
Harmon E. Burns (54) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38) Vice President and
777 Mariners Island Blvd. Chief Financial Officer
San Mateo, CA 94404
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC,
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50) Vice President and Secretary
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC. and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson, Charles E. Johnson, and Rupert H. Johnson, Jr. are
"interested persons" as defined by the 1940 Act, which limits the percentage of
interested persons that can comprise a fund's board of directors/trustees.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers, and the father
and uncle, respectively, of Charles E. Johnson.
Franklin Advisers also serves as investment manager to other U.S. registered
investment companies that have an investment objective similar to that of the
Fund. Franklin Advisers receives and expects to receive from these investment
companies the following investment advisory fees:
<TABLE>
<CAPTION>
APPROXIMATE INVESTMENT MANAGEMENT FEE
NET ASSETS AS OF ---------------------------------------------
INVESTMENT COMPANY NOVEMBER 30, 1999 RATE NET ASSETS
- -----------------------------------------------------------------------------------------------
TEMPLETON VARIABLE
PRODUCTS SERIES FUND
<S> <C> <C> <C>
Small Cap Fund* $52,215,782.77 0.75% up to an including
$200 million
0.65% over $200 million up to and
including $1.3 billion
0.55% over $1.3 billion
FRANKLIN STRATEGIC SERIES
Franklin Small $401,599,884.20 0.625% up to and including
Cap Growth Fund $100 million
0.50% over $100 million up to and
including $250 million
0.45% over $100 million up to and
including $10 billion
0.44% over $10 billion up to and
including $12.5 billion
0.42% over $12.5 billion up to and
including $15 billion
0.40% over $15 billion
</TABLE>
*Franklin Advisers has agreed in advance to assume certain fund expenses, and
Franklin Advisers and FT Services have agreed in advance to waive or limit their
fees so that the total annual fund operating expenses do not exceed 1.00% for
class 1 and 1.25% for class 2. They are contractually obligated to continue this
arrangement through the year 2000.
THE ADMINISTRATORS. Franklin Templeton Services, Inc., 777 Mariners Island
Boulevard, San Mateo, California 94404, provides certain administrative services
and facilities for the Fund. Currently, FT Services subcontracts with Franklin
Advisers. If the proposed contract is approved, FT Services will contract
directly with the Trust on behalf of the Fund. FT Services is wholly owned by
Resources. FT Services is an affiliate of Franklin Advisers and the Fund's
principal underwriter. The administrative services of FT Services include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. Franklin Advisers currently
pays FT Services a monthly fee equal to an annual rate of:
o 0.15% 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 last fiscal year ended December 31, 1998, Franklin Advisers, on
behalf of the Fund, paid FT Services $455,754 in administration fees. If the
proposed advisory contract had been approved and the Fund had entered into a
separate fund administration services contract, FT Services would have been paid
$788,103 during the last fiscal year ended December 31, 1998.
THE PRINCIPAL UNDERWRITER. FranklinTempleton Distributors, Inc.
("Distributors"), 777 Mariners Island Boulevard, San Mateo, California 94404, an
indirect, wholly-owned subsidiary of Resources, serves as the principal
underwriter for the Fund. Distributors may be entitled to receive payment under
the class 2 Rule 12b-1plan. In 1998, Distributors received no fees under the
class 2 Rule 12b-1 plan. Otherwise, Distributors receives no other compensation
for its services as the Funds' principal underwriter.
THE CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street,
New York, New York 10286, acts as custodian of the Fund's securities and other
assets.
ADDITIONAL INFORMATION
ABOUT VOTING AND THE SHAREHOLDERS MEETING
SOLICITATION OF PROXIES. In addition to soliciting proxies by mail, the Trustees
and the employees of the insurance companies may solicit voting instructions
from you in person or by telephone. The cost of soliciting proxies and voting
instructions, including the fees of a proxy soliciting agent, are borne by the
Fund and Franklin Advisers. Neither the Fund nor Franklin Advisers will
reimburse the Trustees, officers, and regular employees and agents involved in
the solicitation of proxies.
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 all counted as shares present and entitled to vote for purposes of
determining the presence of a quorum.
METHODS OF COUNTING THE VOTES. The inspector of election will count the total
number of votes cast "for" approval of the proposal for purposes of determining
whether sufficient affirmative votes have been cast. Abstentions are counted
towards a quorum and will be treated as votes not cast. Under the 1940 Act,
approval of the new investment management agreement requires the affirmative
vote of the shareholder. Thus, abstentions have the same effect as a negative
vote.
The insurance companies holding shares of the Fund are required to vote their
shares in proportion to, and in the manner instructed by, applicable owners of
registered variable annuity and variable life contracts. If no instructions are
returned, the insurance companies will vote the shares in the same proportion as
shares of that Fund for which they have received instructions. If a signed
voting instruction card does not indicate specific instructions, the shares will
be voted in accordance with the Trustees' recommendations.
ADJOURNMENT. If approval 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 any such proposals. Any proposed
adjournment requires the affirmative vote of a majority of shares present at the
meeting.
The insurance companies will vote in favor of such adjournment those shares
which they are entitled to vote in favor of such proposals. They will vote
against such adjournment those shares required to be voted against such
proposals. 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.
REVOCATION OF VOTING INSTRUCTION. Voting instructions may be revoked at any time
before they are voted by (1) delivering a written revocation to the Secretary of
the Trust, (2) forwarding to the Trust a later-dated voting instruction that is
received by the Trust at or prior to the meeting, or (3) attending the meeting
and giving new voting instructions in person.
SHAREHOLDER PROPOSALS. The Trust's Agreement and Declaration of Trust does not
provide for annual meetings of shareholders, and the Trust does not currently
intend to hold such a meeting in the year 2000. Shareholder proposals to be
included in the proxy statement for any subsequent meeting must be received at
the Trust's offices, 777 Mariners Island Boulevard, San Mateo, California 94404,
within a reasonable time before any meeting. If a shareholder submits a proposal
after that date, the proposal will not appear in the proxy statement.
By Order of the Board of Trustees,
Deborah R. Gatzek, Secretary
December 13, 1999
EXHIBIT A
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
ON BEHALF OF
FRANKLIN SMALL CAP FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST, a [Massachusetts business trust] (the "Trust"), on
behalf of FRANKLIN SMALL CAP FUND (the "Fund"), a series of the Trust, and
FRANKLIN ADVISERS, INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an investment
company registered under the Investment Company Act of 1940 (the "1940 Act") for
the purpose of investing and reinvesting its assets in securities, as set forth
in its Agreement and Declaration of Trust, its By-Laws and its Registration
Statements under the 1940 Act and the Securities Act of 1933, all as heretofore
and hereafter amended and supplemented; and the Trust desires to avail itself of
the services, information, advice, assistance and facilities of an investment
adviser and to have an investment adviser perform various management,
statistical, research, investment advisory and other services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the Investment
Advisers Act of 1940, is engaged in the business of rendering investment
advisory, counseling and supervisory services to investment companies and other
investment counseling clients, and desires to provide these services to the
Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to manage the
investment and reinvestment of the Fund's assets and to administer its affairs,
subject to the direction of the Board of Trustees and the officers of the Trust,
for the period and on the terms hereinafter set forth. The Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth for the compensation herein provided.
The Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise), have no authority to act for or represent the Fund or the Trust
in any way or otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The Adviser
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject to and
in accordance with the investment objectives and policies of the Fund and any
directions which the Trust's Board of Trustees may issue from time to time. In
pursuance of the foregoing, the Adviser shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Adviser shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions and (iii) the extent to which those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Adviser agree that the Adviser
shall select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Fund, specifically including
the quotations necessary to determine the Fund's net assets, in such amount of
total brokerage as may reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may lawfully and appropriately
use in their investment advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or which place the Adviser in a
better position to make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may also be useful to the
Adviser and its affiliates in managing other portfolios or advising other
clients, in such amount of total brokerage as may reasonably be required.
Provided that the Trust's officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be considered as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
(c) When the Adviser has determined that the Fund should
tender securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Adviser nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Adviser or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust, not
more frequently than quarterly, of how much total brokerage business has been
placed by the Adviser, on behalf of the Fund, with brokers falling into each of
the categories referred to above and the manner in which the allocation has been
accomplished.
(e) The Adviser agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Adviser's paramount duty to obtain the best net
price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the Adviser
unless the Board of Trustees determines otherwise. Pursuant to its authority,
Adviser shall have the power to vote, either in person or by proxy, all
securities in which the Fund may be invested from time to time, and shall not be
required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held in the Fund, or the issuers thereof,
including actions involving bankruptcy. Should Adviser undertake litigation
against an issuer on behalf of the Fund, the Fund agrees to pay its portion of
any applicable legal fees associated with the action or to forfeit any claim to
any assets Adviser may recover and, in such case, agrees to hold Adviser
harmless for excluding the Fund from such action. In the case of class action
suits involving issuers held in the Fund, Adviser may include information about
the Fund for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers
and employees available to the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration and management of the
Fund and its investment activities.
D. DELEGATION OF SERVICES. The Adviser may, at its expense, select and
contract with one or more investment advisers registered under the Investment
Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for
the Fund for which it is responsible under this Agreement. The Adviser will
compensate any Sub-Adviser for its services to the Fund. The Adviser may
terminate the services of any Sub-Adviser at any time in its sole discretion,
and shall at such time assume the responsibilities of such Sub-Adviser unless
and until a successor Sub-Adviser is selected and the requisite approval of the
Fund's shareholders is obtained. The Adviser will continue to have
responsibility for all advisory services furnished by any Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its own
expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of the
Fund's net assets;
E. Salaries and other compensations of executive officers of the Trust
who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase and
sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and shareholders
of the Fund, reports to the Fund's shareholders, the filing of reports
with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the registration and
continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the registration of
the Fund and its shares under federal and any applicable state laws;
including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and omissions,
and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service used on
its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in cash to
the Adviser based upon a percentage of the value of the Fund's net assets,
calculated as set forth below, as compensation for the services rendered and
obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets of
the Fund shall be determined in the same manner as that Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.550% of the value of its net assets up to and including
$500,000,000; and
0.450% of the value of its net assets over $500,000,000 up to and
including $1,000,000,000; and
0.400% of the value of its net assets over $1,000,000,000 up to and
including $1,500,000,000; and
0.350% of the value of its net assets over $1,500,000,000 up to and
including $6,500,000,000; and
0.325% of the value of its net assets over $6,500,000,000 up to and
including $11,500,000,000; and
0.300% OF THE VALUE OF ITS NET ASSETS OVER $11,500,000,000 UP TO AND
INCLUDING $16,500,000,000; AND
0.290% of the value of its net assets over $16,500,000,000 up to and
including $19,000,000,000; and
0.280% of the value of its net assets over $19,000,000,000 up to and
including $21,500,000,000; and
0.270% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or eliminated
to the extent that Distributors has actually received cash payments of tender
offer solicitation fees less certain costs and expenses incurred in connection
therewith and to the extent necessary to comply with the limitations on expenses
which may be borne by the Fund as set forth in the laws, regulations and
administrative interpretations of those states in which the Fund's shares are
registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month, the
accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund hereunder
are not to be deemed exclusive, and the Adviser and any of its affiliates shall
be free to render similar services to others. Subject to and in accordance with
the Agreement and Declaration of Trust and By-Laws of the Trust and Section
10(a) of the 1940 Act, it is understood that trustees, officers, agents and
shareholders of the Trust are or may be interested in the Adviser or its
affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Adviser, the Adviser shall not be subject to liability to the Trust or the Fund
or to any shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse the
Trust for any and all costs, expenses, and counsel and trustees' fees reasonably
incurred by the Trust in the preparation, printing and distribution of proxy
statements, amendments to its Registration Statement, holdings of meetings of
its shareholders or trustees, the conduct of factual investigations, any legal
or administrative proceedings (including any applications for exemptions or
determinations by the Securities and Exchange Commission) which the Trust incurs
as the result of action or inaction of the Adviser or any of its affiliates or
any of their officers, directors, employees or stockholders where the action or
inaction necessitating such expenditures (i) is directly or indirectly related
to any transactions or proposed transaction in the stock or control of the
Adviser or its affiliates (or litigation related to any pending or proposed or
future transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or, (ii)
is within the control of the Adviser or any of its affiliates or any of their
officers, directors, employees or stockholders. The Adviser shall not be
obligated pursuant to the provisions of this Subparagraph 6(B), to reimburse the
Trust for any expenditures related to the institution of an administrative
proceeding or civil litigation by the Trust or a shareholder seeking to recover
all or a portion of the proceeds derived by any stockholder of the Adviser or
any of its affiliates from the sale of his shares of the Adviser, or similar
matters. So long as this Agreement is in effect, the Adviser shall pay to the
Trust the amount due for expenses subject to this Subparagraph 6(B) within 30
days after a bill or statement has been received by the Adviser therefor. This
provision shall not be deemed to be a waiver of any claim the Trust may have or
may assert against the Adviser or others for costs, expenses or damages
heretofore incurred by the Trust or for costs, expenses or damages the Trust may
hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and
shall continue in effect for two (2) years thereafter, unless sooner terminated
as hereinafter provided and shall continue in effect thereafter for periods not
exceeding one (1) year so long as such continuation is approved at least
annually (i) by a vote of a majority of the outstanding voting securities of
each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a vote
of a majority of the Trustees of the Trust who are not parties to the Agreement
(other than as Trustees of the Trust), cast in person at a meeting called for
the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to the Adviser;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
iii) may be terminated by the Adviser on 60 days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed
and delivered, or mailed post-paid, to the other party at any office of such
party.
8. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the ____ day of ____________.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
on behalf of Franklin Small Cap Fund
By ________________________________
FRANKLIN ADVISERS, INC.
By: ________________________________
EXHIBIT B
FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED
TO BE AMENDED OR ELIMINATED
<TABLE>
<CAPTION>
- --------------------- --------------------- ------------------------------------ -------------------------------------
<S> <C> <C> <C>
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT FUNDAMENTAL RESTRICTION PROPOSED FUNDAMENTAL RESTRICTION
- --------------------- --------------------- ------------------------------------ -------------------------------------
2a Diversification 1. With respect to 75% of its 7. Purchase the securities of any
total assets . . . purchase the one issuer (other than the U.S.
securities of any one issuer government or any of its agencies
(other than cash, cash items and or instrumentalities or securities
obligations of the U.S. of other investment companies) if
Government) if immediately immediately after such investment
thereafter, and as a result of the (a) more than 5% of the value of
purchase, the fund would (a) have the fund's total assets would be
more than 5% of the value of its invested in such issuer or (b) more
total assets invested in the than 10% of the outstanding voting
securities of such issuer or (b) securities of such issuer would be
hold more than 10% of any or all owned by the fund, except that up
classes of the securities of any to 25% of the value of the fund's
one issuer; total assets may be invested
without regard to such 5% and 10%
limitations.
- --------------------- --------------------- ------------------------------------ -------------------------------------
2b Borrowing 2. Borrow money in an amount in 1. Borrow money, except that the
excess of 5% of the value of its fund may borrow money from banks or
total assets, except from banks affiliated investment companies to
for temporary or emergency the extent permitted by the 1940
purposes, and not for direct Act, or any exemptions therefrom
investment in securities; which may be granted by the SEC, or
for temporary or emergency purposes
and then in an amount not exceeding
331/3% of the value of the fund's
total assets (including the amount
borrowed).
- --------------------- --------------------- ------------------------------------ -------------------------------------
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT FUNDAMENTAL RESTRICTION PROPOSED FUNDAMENTAL RESTRICTION
- --------------------- --------------------- ------------------------------------ -------------------------------------
2c Lending 3. Lend its assets, except through 3. Make loans to other persons
the purchase or acquisition of except (a) through the lending of
bonds, debentures or other debt its portfolio securities, (b)
securities of any type customarily through the purchase of debt
purchased by institutional securities, loan participations
investors, or through loans of and/or engaging in direct corporate
portfolio securities, or to the loans in accordance with its
extent the entry into a repurchase investment objectives and policies,
agreement may be deemed a loan; and (c) to the extent the entry
into a repurchase agreement is
deemed to be a loan. The fund
may also make loans to affiliated
investment companies to the extent
permitted by the 1940 Act or any
exemptions therefrom which may be
by the SEC.
- --------------------- --------------------- ------------------------------------ -------------------------------------
2d Underwriting 4. Underwrite securities of other 2. Act as an underwriter except to
issuers . . . except insofar as a the extent the fund may be deemed
fund may be technically deemed an to be an underwriter when disposing
underwriter under the federal of securities it owns or when
securities laws in connection with selling its own shares.
the disposition of portfolio
securities;
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Illiquid Securities 5. Purchase illiquid securities, Proposed to be Eliminated.
including illiquid securities
which, at the time of acquisition,
could be disposed of publicly by
the [fund] only after registration
under the Securities Act of 1933,
if as a result more than 10% of
[its] net assets would be invested
in such illiquid securities;
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Control or 6. Invest in securities for the Proposed to be Eliminated.
purpose of exercising Management
management or control of the
issuer;
- --------------------- --------------------- ------------------------------------ -------------------------------------
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT FUNDAMENTAL RESTRICTION PROPOSED FUNDAMENTAL RESTRICTION
- --------------------- --------------------- ------------------------------------ -------------------------------------
2g Concentration 7. Invest more than 25% of its 6. Concentrate (invest more than
assets (measured at the time of 25% of its net assets) in
the most recent investment) in any securities of issuers in a
single industry; particular industry (other than
securities issued or guaranteed by
the U.S. government or any of its
agencies or instrumentalities or
securities of other investment
companies).
- --------------------- --------------------- ------------------------------------ -------------------------------------
2f, 3 Senior Securities 9. Maintain a margin account with 5. Issue securities senior to the
a securities dealer or effect fund's presently authorized shares
short sales; of beneficial interest. Except that
this restriction shall not be deemed
to prohibit the fund from (a) making
any permitted borrowings, loans, mortages
or pledges, (b) entering into options,
futures contracts, forward contracts,
repurchase transactions, or reverse
repurchase transactions, or (c) making
short sales of securities to the
extent permitted by the 1940 Act and
any rule or order thereunder, or SEC
staff interpretations thereof.
- --------------------- --------------------- ------------------------------------ -------------------------------------
2e Commodities 10. Invest in commodities or 4. Purchase or sell real estate and
commodity pools . . . Securities commodities, except that the fund
or other investments backed by may purchase or sell securities of
commodities are not considered real estate investment trusts, may
commodities or commodity contracts purchase or sell currencies, may
for the purposes of this enter into futures contracts on
restriction; securities, currencies, and other
indices or any other financial
instruments, and may purchase and
sell options on such futures
contracts.
- --------------------- --------------------- ------------------------------------ -------------------------------------
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT FUNDAMENTAL RESTRICTION PROPOSED FUNDAMENTAL RESTRICTION
- --------------------- --------------------- ------------------------------------ -------------------------------------
2e Real Estate 11. Invest directly in real 4. Purchase or sell real estate and
estate. . . . First mortgage loans commodities, except that the fund
or other direct obligations may purchase or sell securities of
secured by real estate are not real estate investment trusts, may
considered real estate for purchase or sell currencies, may
purposes of this restriction; enter into futures contracts on
securities, currencies, and other
indices or any other financial
instruments, and may purchase and
sell options on such futures contracts.
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Investment in 12. Invest in the securities of Proposed to be Eliminated.
other Investment other open-end investment
Companies companies (except that securities
of another open-end investment
company may be acquired pursuant to
a plan of reorganization, merger,
consolidation or acquisition).
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Securities with 13. Invest in assessable Proposed to be Eliminated.
Unlimited Liability securities or securities involving
unlimited liability on the part of
the fund;
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Restricted 14. Invest an aggregate of more Proposed to be Eliminated.
Securities than 10% of its assets in
securities with legal or contractual
restrictions on resale, securities
on resale, securities which are not
readily marketable (including
over-the-counter options and assets
used to cover such options), and
repurchase agreements with more than
seven days to maturity;
- --------------------- --------------------- ------------------------------------ -------------------------------------
- --------------------- --------------------- ------------------------------------ -------------------------------------
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT FUNDAMENTAL RESTRICTION PROPOSED FUNDAMENTAL RESTRICTION
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Management 15. Purchase or retain any Proposed to be Eliminated.
Ownership of security if any officer, director
Securities or security holder of the issuer
is at the same time an officer,
trustee or employee of the Trust or
of the fund's Manager and such
person owns beneficially more than
one-half of 1% of the securities and
all such persons owning more than
one-half of 1% own more than 5% of
the outstanding securities of the
issuer; or
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Tax 16. Invest its assets in a manner Proposed to be Eliminated.
Diversifi-cation which does not comply with the
for Variable investment diversification
Annuity Funds requirements of Section 817(h) of
the Code.
- --------------------- --------------------- ------------------------------------ -------------------------------------
3 Illiquid Securities 17. Invest more than 10% of its Proposed to be Eliminated.
assets in illiquid securities
(including illiquid equity
securities, repurchase agreements
of more than seven days duration,
over-the-counter options and
assets used to cover such options
and other securities which are not
readily marketable), as more fully
described in the prospectus and
SAI.
- --------------------- --------------------- ------------------------------------ -------------------------------------
</TABLE>
EXHIBIT C
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS
PROPOSED TO BE ELIMINATED
Ten of the Fund's current fundamental investment restrictions have been proposed
to be eliminated, and are listed in the table below.
- -------------------------------- -----------------------------------------------
SUBJECT CURRENT INVESTMENT RESTRICTION STATES THAT THE
FUND MAY NOT:
Illiquid Securities 5. Purchase illiquid securities, including
illiquid securities which, at the time of
acquisition, could be disposed of publicly by
the funds only after registration under the
Securities Act of 1933, if as a result more
than 10% of their net assets would be invested
in such illiquid securities;
Control or 6. Invest in securities for the purpose of
Management exercising management or control of the issuer;
Senior Securities 9. Maintain a margin account with a securities
dealer or effect short sales;
Investment In other Investment 12. Invest in the securities of other open-end
Companies investment companies (except that securities of
another open-end investment company may be
acquired pursuant to a plan of reorganization,
merger, consolidation or acquisition).
Securities with Unlimited 13. Invest in assessable securities or
Liability securities involving unlimited liability on the
part of the fund;
Restricted Securities 14. Invest an aggregate of more than
10% of its assets in securities with legal or
contractual restrictions on resale, securities
on resale, securities which are not readily
marketable (including over-the-counter options
and assets used to cover such options), and
repurchase agreements with more than seven days
to maturity;
Management Ownership of 15. Purchase or retain any security if any
Securities officer, director or security holder of the
issuer is at the same time an officer, trustee
or employee of the Trust or of the fund's
Manager and such person owns beneficially more
than one-half of 1% of the securities and all
such persons owning more than one-half of 1%
own more than 5% of the outstanding securities
of the issuer; or
Tax Diversification for 16. Invest its assets in a manner which does
Variable Annuity Funds not comply with the investment diversification
requirements of Section 817(h) of the Code.
Illiquid Securities 17. Invest more than 10% of its assets in
illiquid securities (including illiquid
equity securities, repurchase agreements of
more than seven days duration, over-the-counter
options and assets used to cover such options
and other securities which are not readily
marketable), as more fully described in the
prospectus and SAI.
[PRINT NAME OF INSURANCE COMPANY HERE]
These voting instructions are solicited by [ the above-referenced
insurance company ] in connection with a solicitation of proxies by the
Trustees of the Franklin Templeton Variable Insurance Products Trust.
VOTING INSTRUCTIONS FORM - FRANKLIN SMALL CAP FUND
If you return a properly executed voting instruction card with express voting
instructions, your insurance company will vote those shares in accordance with
your instructions. If you return the voting instruction card properly executed
but with no express voting instructions indicated on such card, your insurance
company will vote the shares in accordance with the Trustees' recommendations.
If you do not return the voting instruction card at all, your insurance company
will vote the shares of the Fund attributable to your insurance contract in the
same manner and in the same proportion as the shares of that Fund for which it
has received instructions.
PLEASE SIGN IN THE BOX BELOW
Note: If a contract is held jointly, each contract owner should sign. If only
one contract owner signs, his or her signature will be binding. If the contract
owner is a corporation, the President or Vice President should sign in his or
her own name, indicating title. If the contract owner is a partnership, a
partner should sign in his or her own name, indicating that he or she is a
"Partner." If the contract owner is a trust, the trustee should sign in his or
her own name, indicating that he or she is a "Trustee."
- ------------------------------------
- ------------------------------------
Signature(s), Title(s) if applicable.
Dated:
THESE VOTING INSTRUCTIONS, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE CONTRACT OWNER. IF THESE VOTING INSTRUCTIONS ARE EXECUTED AND NO
DIRECTION IS MADE, THESE VOTING INSTRUCTIONS WILL BE VOTED FOR ALL PROPOSALS AND
SUB-PROPOSALS AND IN THE DISCRETION OF THE INSURANCE COMPANY UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF PROPOSALS
1, 2, AND 3. PLEASE VOTE BY FILLING IN THE APPROPRIATE BOXES BELOW.
PROPOSAL 1. To approve the adoption of new investment advisory
agreement for the Fund, as described more fully in the proxy
statement.
For [ ] Against [ ] Abstain [ ]
PROPOSAL 2. To approve changes in the following fundamental investment
restrictions for the Fund, as described more fully in this
proxy statement. Modification of fundamental investment
restriction regarding:
(a) Diversification For [ ] Against [ ] Abstain [ ]
(b) Borrowing For [ ] Against [ ] Abstain [ ]
(c) Lending For [ ] Against [ ] Abstain [ ]
(d) Underwriting For [ ] Against [ ] Abstain [ ]
(e) Concentration For [ ] Against [ ] Abstain [ ]
(f) Senior Securities For [ ] Against [ ] Abstain [ ]
(g) Real Estate and Commodities, which would combine these two
separate fundamental restrictions
For [ ] Against [ ] Abstain [ ]
PROPOSAL 3. To approve the elimination of certain fundamental
investment restrictions for the Fund, as described more fully
in this proxy statement.
For [ ] Against [ ] Abstain [ ]
OTHER BUSINESS. To vote upon any other business which may legally presented at
the meeting or any adjournment thereof.
Grant [ ] Withhold [ ] Abstain [ ]
PLEASE FILL-IN, SIGN, DATE AND RETURN THE VOTING INSTRUCTION FORM IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. VOTING INSTRUCTIONS MUST BE RECEIVED BY FEBRUARY
4, 2000 TO BE VOTED AT THE MEETING TO BE HELD ON FEBRUARY 8, 2000.
