Draft Dated November 4, 1999
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:
[ X ] Preliminary Proxy Statement
[ ]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: ______________________________________________
[FT LOGO]
Franklin(R) Templeton(R)
777 Mariners Island Boulevard
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 ____ 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....................5
Proxy Statement..............................................6
Information About Voting.....................................6
Who is asking for my vote?.................................6
Who is eligible to vote?...................................6
On what issues am I being asked to vote?...................6
What vote is required?.....................................6
How do the Trustees recommend that I vote?.................7
Can I revoke my voting instruction?........................7
The Proposals................................................7
Proposal 1: Approving or Disapproving the New Investment Management
Agreement ......................................7
What are the terms of the existing and proposed
contracts?................................................7
How has the Fund performed under Franklin Advisers'
direction?..............................................122
What factors did the Trustees consider prior to recommending
approval of the proposed contract?......................122
Proposals 2 & 3 -Changes to the Fundamental Investment
Restrictions of the Fund................. ...............133
Why are we proposing amendments or eliminating certain
fundamental investment restrictions?.....................144
Proposal 2: To Approve Amendments to Certain of the Fund's
Fundamental Investment Restrictions...... ...............144
Sub-Proposal 2a: To amend the Fund's fundamental
investment restriction regarding diversification of
investments.............................................155
What effect will the change in the current investment
diversification restriction have on the Fund?............155
Sub-Proposal 2b: To amend the Fund's fundamental investment
restriction regarding borrowing......... ................155
What effect will the change in the current borrowing
restriction have on the Fund?...........................155
Sub-Proposal 2c: To amend the Fund's fundamental investment
restriction regarding lending.. .........................166
What effect will standardization of the current lending
restriction have on the Fund?............................166
Sub-Proposal 2d: To amend the Fund's fundamental investment
restriction regarding underwriting.......................166
What effect will changing the current underwriting restriction
have on the Fund?........................................177
Sub-Proposal 2e: To amend the Fund's fundamental investment
restrictions regarding investments in real estate and
commodities..............................................177
What effect will combining and revising the real estate and
commodities restrictions have on the Fund?................177
Sub-Proposal 2f: To amend the Fund's fundamental investment
restriction regarding issuing senior securities.... ......188
What effect will amending the restriction regarding issuing
senior securities have on the Fund?......................188
Sub-Proposal 2g:To amend the Fund's fundamental investment
restriction regarding.....................................199
Concentration of the Fund's investments in the same
industry.................................................199
What effect will amending the current restriction regarding
industry concentration have on the Fund?.................199
Proposal 3: To Approve the Elimination of Certain of the
Fund Fundamental Investment Restrictions.................199
Which fundamental investment restrictions is the Board
recommending that the Fund eliminate?...................199
Illiquid and Restricted Securities......................199
Control or Management....................................20
Securities on Margin.....................................20
Investment in Other Investment Companies.................20
Securities with Unlimited Liability......................21
Management Ownership of Securities.......................21
Tax Diversification for Variable Annuity Funds...........21
Why are we recommending that the restrictions be
eliminated?.............................................22
What are the risks, if any, in eliminating the
restrictions?...........................................22
Proposal 4: Other Business..................................22
Information About the Trust and the Fund....................22
Additional Information About Voting and the Shareholders
Meeting...................................................29
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 ___ 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.
1. A new investment advisory agreement between Franklin Advisers, Inc.
("Franklin Advisers") and the Trust on behalf of the Fund, as
described in the Proxy Statement, which will increase the total
expenses of the Fund.
2. Changes to certain fundamental investment restrictions of the Fund.
3. 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 ___ 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:
1. 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.
2. Changes to certain fundamental investment restrictions of the Fund.
3. 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:
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.
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 as the Fund's assets grow.
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:
CURRENT INVESTMENT ADVISORY FEE PROPOSED INVESTMENT ADVISORY FEE
(INCLUDES ADMINISTRATIVE (WILL NOT INCLUDE ADMINISTRATIVE
SERVICES) SERVICES)
RATE ASSETS RATE ASSETS
0.750% Up to and including $500 0.550%Up to and including $500
million million
0.625 Over $500 million, up to 0.450 Over $500 million, up to and
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
CURRENT ADMINISTRATION FEE PROPOSED ADMINISTRATION FEE
(PAID FROM INVESTMENT ADVISORY FEE) (PAID BY THE FUND)
RATE NET ASSETS RATE NET ASSETS
0.150% Up to and including $200 0.250% Annual flat rate on
million all assets
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
CURRENT TOTAL FEES PROPOSED TOTAL FEES
(INVESTMENT MANAGEMENT AND (INVESTMENT MANAGEMENT AND
ADMINISTRATION FEE) ADMINISTRATION FEE)
RATE NET ASSETS RATE NET ASSETS
0.750% Up to and including $500 0.800% Up to and including $500
million million
0.625 Over $500 million, up to 0.700 Over $500 million, up to and
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
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 $21.5 billion
If approved, the proposed contract will become effective May 1, 2000 and
will continue in effect until April 30, 2002, and thereafter from year to
year as long as approved annually by the Trustees at a meeting called for
that purpose or by a vote of the Fund's shareholders.
COMPARISON OF FEES AND EXPENSES UNDER THE EXISTING CONTRACT AND THE
PROPOSED CONTRACT.
The following tables and example are provided to help you understand and
compare the various costs and expenses of the Fund that would be borne
directly or indirectly by the shareholders of the Fund under the existing
contract and the proposed contract. The tables include only expenses and
fees charged at the Fund level and do not reflect separate account or
contract-based fees and expenses or sales loads.
Shown below is a comparison of fees and expenses the Fund incurred
during the fiscal year ended December 31, 1998, and the fees and expenses the
Fund would have incurred had the proposed fee increase been in effect during
that same period.
COMPARISON OF INVESTMENT ADVISORY AND FUND ADMINISTRATION FEES
CLASS 1 CLASS 2
INVESTMENT ADVISORY FEE
RATE
Current Agreement..... .60% .60%
Proposed Agreements... .55% .55%
Change................ (0.05%) (0.05%)
FUND ADMINISTRATION FEE
RATE
Current Agreement..... .15% .15%
Proposed Agreements... .25% .25%
Change................ .10% .10%
TOTAL INVESTMENT
ADVISORY FEE
Current Agreement.....$ 1,909,555$ 1,909,555
Proposed Agreements...$ 1,733,827$ 1,733,827
Difference between
aggregate ($ ($
-------- --------
Amounts.............. 175,728) 175,728)
-------- --------
TOTAL =FUND
ADMINISTRATION FEE
Current Agreement..... $ 455,754 $ 455,754
Proposed Agreements... $ 788,103 $ 788,103
Difference between
aggregate
Amounts.............. $ 332,349 $ 332,349
----------- ---------
TOTAL INVESTMENT
ADVISORY AND FUND
ADMINISTRATION FEES
Current Agreement...... $ 2,365,309 $ 2,365,309
Proposed Agreement..... $ 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
------------ ------------
COMPARISON OF TOTAL ANNUAL FUND OPERATING EXPENSES
CLASS 1 CLASS 2
ANNUAL FUND CURRENT PROPOSED CURRENT PROPOSED
EXPENSES
Investment 0.60% 0.55% 0.60% 0.55%
Advisory Fee.....
Fund 0.15% 0.25% 0.15% 0.25%
Administration Fee
Distribution Fees None None 0.25% 0.25%
Other Expenses... 0.02% 0.27% 0.02% 0.27%
----- ----- ----- -----
Total Fund
Annual 0.77% 0.82% 1.02% 1.07%
===== ===== ===== =====
Operating Expenses
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:
1 Year 3 Years 5 Years 10 Years
CURRENT PROPOSED CURRENT PROPOSED CURRENT PROPOSED CURRENT PROPOSED
Class 1 $ 79 $ 84 $246 $262 $428 $455 $ 954 $1014
Class 2 $104 $109 $325 $340 $563 $590 $1248 $1306
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 CUMULATIVE AVERAGE CUMULATIVE
ANNUAL TOTAL ANNUAL TOTAL
TOTAL RETURN(2) TOTAL RETURN(2)
RETURN(1) RETURN(1)
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 by
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 similar mutual funds
as selected by Lipper. 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 necessary
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:
VIP FRANKLIN
RESTRICTION SMALL CAP FUND
PROPOSAL 3 - MODIFICATION OF
RESTRICTIONS
(each sub-proposal must be
individually approved)
(a) Diversification X
(b) Borrowing X
(c) Lending X
(d) Underwriting X
(e) Concentration X
(f) Senior Securities X
(g) Real Estate and Commodities* X
PROPOSAL 4 - ELIMINATION OF
RESTRICTIONS
(all of the following approved
as a group)
Illiquid Securities** X
Exercising Control or Management X
Margin Securities X
Investment in Other Investment X
Companies
Securities with Unlimited X
Liability
Restricted Securities X
Management Ownership of X
Securities
Compliance with Section 817(h) X
*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 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 FUNDS' 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 33 1/3% 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 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 have 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.
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:
[to come]
NUMBER OF
SHARES
NET ASSETS OUTSTANDING
CLASS 1
CLASS 2
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 PERCENT PREFERRED PERCENT
LIFE OF LIFE OF
SEPARATE OUTSTANDING SEPARATE OUTSTANDING
ACCOUNT B SHARES ACCOUNT C SHARES
--------- --------- --------- ------------
CLASS 1
CLASS 2
*Edward J. Bonach (45) serves as a Trustee of the Trust and is Senior Vice
President and Chief Financial Officer of Allianz Life Insurance Company of
North America; President and Chief Executive Officer of Canadian American
Financial Corporation; and a Director of Preferred Life Insurance Company
of New York and Life USA Holding, Inc. Mr. Bonach may 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 company will exercise voting rights
attributable to the shares held by it in accordance with voting instructions
received from owners of registered variable annuity and variable life
contracts. To this extent, such insurance company does not exercise control
over the Trust or the Fund by virtue of the voting rights arising from its
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:
NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS
- -----------------------------------------------------------------
Charles B. Johnson
Director and 777 Mariners Island
Chairman of the Board Executive Manager Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Rupert H. Johnson, Jr. 777 Mariners Island
Director and President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
R. Martin Wiskemann
Director and Senior 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Harmon E. Burns 777 Mariners Island
Executive Vice Attorney Blvd.
President San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Martin L. Flanagan 777 Mariners Island
Executive Vice Accountant Blvd.
President San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Deborah R. Gatzek
Executive Vice 777 Mariners Island
President Attorney Blvd.
and Assistant San Mateo,
Secretary California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Edward B. Jamieson 777 Mariners Island
Executive Vice Securities Analyst Blvd.
President San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Thomas J. Kenny 777 Mariners Island
Executive Vice Securities Analyst Blvd.
President San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Jack Lemein 777 Mariners Island
Executive Vice Securities Analyst Blvd.
President San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Sheila Amoroso 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Matt Avery 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Roger Bayston 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
David Capurro 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Rafael Costas 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Frank M. Felicelli 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Sally Haff 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Conrad Herrmann 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Chauncey Lufkin 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Christopher Molumphy 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Thomas Runkel 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Bernard Schroer 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Thomas Walsh 777 Mariners Island
Senior Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Benjamin Barber 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Doug Barton 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Catherine Bowman 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Kenneth Broad 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Molly Butler 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Canyon Chan 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Tony Coffey 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Lisa Costa 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Fred Fromm 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Shan Green 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
John Hopp 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Steven Hiatt 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Jeff Holbrook 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Charles E. Johnson 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Gregory E. Johnson 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Ian Link 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Michael McCarthy 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Evan McCulloch 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Thomas Orphanos 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Mark Orsi 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Scott Owens 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Serena Perin 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Ed Perks 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
John Pomeroy 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
David Rath 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Betsy Schwab 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Kent Shepherd 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Richard Smyth 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Theresa Spath 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Eric Takaha 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Kurt Von Emster 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Glenn Voyles 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
John Wiley 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Jeffrey Wilson 205 9th Street N.
Vice President Securities Analyst St. Petersburg,
Florida
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Stella Wong 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Robert Yolland 777 Mariners Island
Vice President Securities Analyst Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Charles R. Sims 777 Mariners Island
Vice President Accountant Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Kenneth A. Lewis 777 Mariners Island
Vice President Accountant Blvd.
San Mateo,
California
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Leslie M. Kratter 777 Mariners Island
Secretary Attorney Blvd.
San Mateo,
California
- -----------------------------------------------------------------
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 Chief Financial Officer
777 Mariners Island Blvd.
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 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:
Approximate Investment Management Fee
net assets as
Investment of
Company November 30,
1999
Rate Net Assets
- -----------------------------------------------------------------
TEMPLETON
VARIABLE
PRODUCTS SERIES
FUND
Small Cap Fund $xxx,xxx,xxx 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
Cap Growth Fund $xxx,xxx,xxx 0.625% up to and including
$100 million
0.50% over $100 million up
to an including $250
million
0.45% over $100 million up
to and including $10
billion
0.44% over $10 billion up to
an including $12.5
billion
0.42% over $12.5 billion up
to and including $15
billion
0.40% over $15 billion
THE ADMINISTRATORS. Franklin Templeton Services, Inc. ("FT
Services") 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.
<PAGE>
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
[PRINT NAME OF INSURANCE COMPANY HERE]
VOTING INSTRUCTIONS FORM - FRANKLIN SMALL CAP FUND
Indicate your voting instructions below by filling in the appropriate boxes
in this manner [ X ] using blue or black ink or dark pencil.
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 your
insurance contract in the same manner and in the same proportion as the
shares of that Fund for which it has received instructions.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSALS.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOXES BELOW.
PROPOSAL 1.To approve the adoption of new investment
advisory agreement for the Fund, which would result in slightly
higher total expenses, 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
the combined proxy statement/prospectus.
For [ ] Against [ ] Abstain [ ]
OTHER BUSINESS. To vote upon any other business which may
legally presented at the meeting or any adjournment thereof.
Grant [ ] Withhold [ ]
Signed ___________________________ Date:-------------------------
PLEASE FILL-IN, SIGN, DATE AND RETURN THE VOTING INSTRUCTION FORM IN THE
ENCLOSED
POSTAGE-PAID ENVELOPE. VOTING INSTRUCTIONS MUST BE RECEIVED BY FEBRUARY __,
2000 TO BE VOTED AT THE MEETING TO BE HELD ON FEBRUARY 8, 2000.
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.
